It can be hard to learn to receive a compliment graciously, but it is an important skill. I find it helps to think of a compliment as a little gift. It feels awkward or immodest to say "thank you" when you feel as if you were agreeing with praise of yourself, but not if you think of it as thanking them for being nice to you
. You know you don't want to slap them back for that.
I enjoy seeing people seem happy when I respond with something like, "Oh, thank you for noticing! It's my favorite" or "Thank you! My mother-in-law gave it to me; she will enjoy knowing I'm getting compliments on it." Even if you are so "Minnesotan"
that you can't resist saying something sort of self-deprecating, you can make it work: "Oh, thank you for saying that! I was actually wondering if I looked good in this, but you've really helped me feel confident about it." That way the person feels good for complimenting you, not like their gesture and goodwill were rejected.
Whether you correct someone else on this depends on your relationship
and the circumstances. I wouldn't do it unless I were close with her, and I wouldn't do it in front of anyone else. Your response was good, although I would try to resist the temptation to sigh heavily and say "The correct response is to say 'thank you.'" I'm guessing that made her feel a bit scolded, like a naughty child.
But I really like this part: "It makes me feel like a jerk with bad taste when you deflect me saying something nice." As Toots points out, "I messages" and asking for what you need are usually a better bet than judgment and "you always" statements -- i.e., "When you ___, it makes me feel ___, so please ____" instead of "You always ___, and you shouldn't; you should ____." So in this case, you might have said, "You know, Kim, I wish you would just say thank you. I know many people find it difficult to accept compliments. But when you deflect my compliments, it makes me feel like I have bad taste."
I think that something like that would be less likely to distract the listener into thinking "Who does she think she is, giving me a manners lesson?" when what we want is for her to be thinking, "Oh, gosh, I thought I was just being modest -- I didn't realize I was making her feel rejected."