The Internal Revenue Service issued guidance Friday on how to deal with state and local tax refunds in the context of the $10,000 limit on state and local tax deductions under the Tax Cuts and Jobs Act.

The question has perplexed some tax experts and their clients this season, which will be the first one under the new tax law. Taxpayers in so-called “blue states” with high state and local taxes and Democratic lawmakers representing them have complained about the $10,000 limit under the Republican-sponsored tax law. It was the subject of a hearing this week in the House Ways and Means Committee. The interplay of the traditional refund on state and local taxes adds extra complexity to the matter.

In Revenue Ruling 2019-11, posted Friday on IRS.gov, the IRS offered four examples to show how the traditional tax break interacts with the new SALT deduction limit to calculate the portion of any state or local tax refund that must be included on the taxpayer’s federal income tax return. Friday’s announcement does not affect state tax refunds received in 2018 for tax returns currently being filed, the IRS noted. It only applies starting this year.

The Tax Cuts and Jobs Act, which Congress passed in December 2017, limited the itemized deduction for state and local taxes to $5,000 for a married person filing a separate return and $10,000 for all other tax filers. The limit applies to tax years 2018 to 2025. While Congress made “permanent” changes in the tax code for corporations, the changes in the Tax Cuts and Jobs Act only apply until 2025 for individual taxpayers and pass-through businesses in order to keep the cost below the $1.5 trillion the law was estimated to add to the budget deficit.

As in the past, state and local tax refunds aren’t subject to tax if a taxpayer chose the standard deduction for the year in which the tax was paid. But if a taxpayer itemized deductions for that year on Schedule A, Itemized Deductions, a portion or all of the refund may be subject to tax, to the extent the taxpayer received a tax benefit from the deduction.

Taxpayers who are affected by the SALT deduction cap — that is, those who itemize deductions and who paid state and local taxes exceeding the SALT limit — may not be required to include the entire state or local tax refund in income in the following year. A key part of that calculation is determining the amount the taxpayer would have deducted had the taxpayer only paid the actual state and local tax liability—that is, no refund and no balance due.

In one example described in the ruling, a single taxpayer itemizes and claims deductions amounting to $15,000 on their 2018 federal income tax return. A total of $12,000 in state and local taxes is marked on the return, including state and local income taxes of $7,000. Because of the limit, though, the taxpayer’s SALT deduction is only $10,000. In 2019, the taxpayer receives a $750 refund of state income taxes paid in 2018, meaning the taxpayer’s actual 2018 state income tax liability was $6,250 ($7,000 paid minus $750 refund). That means the taxpayer’s 2018 SALT deduction would still have been $10,000, even if it had been calculated based on the actual $6,250 state and local income tax liability for 2018. The taxpayer didn’t get a tax benefit on their 2018 federal income tax return from their overpayment of state income tax in 2018. Therefore, the taxpayer isn’t required to include their 2019 state income tax refund on their 2019 return.

The revenue ruling includes several other hypothetical examples and details. It has no impact on state or local tax refunds received last year and reportable on 2018 returns taxpayers are filing this season. For information, including worksheets for reporting these refunds, see the 2018 instructions for Form 1040, U.S. Individual Income Tax Return, and Publication 525, Taxable and Nontaxable Income.