if you owed $30,000 in state taxes in the previous year and paid $37,000 in the current year, the deductible amount for federal tax purposes would be limited to $10,000. The excess payment of $27,000 ($37,000 - $10,000) would not be eligible for a federal deduction.

In this case, there would be no need to add back the excess payment of $27,000 as income on the federal Form 1041 since it was not deductible in the first place.

why do we not add back the excess amount as a refund ?