I agree with Phoebe.  I'm not on the Lacerte side of the house, but if their worksheet is thinking that part of the state tax refund will be taxable (when other taxes are already >$10K) then it's a bug in the worksheet.  From a federal tax standpoint, if there's no tax benefit (i.e. the tax does not change by including/excluding the deduction), there's no taxable recovery.

I'm much more concerned at the state level with so many different sets of rules in play.  In some states you'll get a taxpayer favorable result by choosing to deduct sales taxes instead of income taxes in these situations.  This is something that's rarely been an issue in the past, but this year I think we should be looking at different situations on a state-by-state basis.  I doubt any tax software is going to be able to analyze this for us.

Rick