Why is my previous year tax return considered income?

[VolvoGirl · Accepted solution]

A State Tax Refund is taxable if you itemized deductions on that prior year's federal return and took a deduction for state income taxes instead of the sale tax.  You got a deduction benefit for it so now you have to include it as income. If you took the standard deduction or filed a 1040EZ or 1040A it is not taxable and you don't need to report it.

To enter a state refund just type  1099-G or 1099-g (with the dash)  in the search box at the top of your return and click on Jump To it.

OR  Enter the 1099G under
 Federal on the left side
Wages & Income at the top
 
Scroll down to  Other Common Income
      You might need click on Show More to expand the section

Then it's the first line for Refunds Received for State/Local Tax Returns - Click Start or Revisit
     You do not want the next line that says Other 1099G Income
 
On the first screen check YES - Received a State Refund.