Federal Tax Credit Is Free From California Tax - Brief Article

California CPA, Oct, 2001

Is the federal advance refund or tax credit under IRS Sec 6428 subject to California income tax? No, says the FTB

In Legal Ruling 2001-3, the FTB states that the advance tax refund is considered an overpayment of federal income tax. Refunds or abatements of federal income taxes constitute a return of capital. The return of capital does not constitute income, as there is no economic gain or accession to wealth. Moreover, the tax benefit rule does not require the refund be taken into income because the amount refunded was never deducted under California law.