Why is my state income tax refund not taxable?

Forum|Forum|6 years ago
February 27, 2020
3 replies
1 view

I itemized last year and deducting my state income taxes did reduce my federal tax. My state and local taxes were less than the $10,000 limit. I did not use the option to deduct general sales tax. (The sales tax would have been much smaller.) I did not meet any of the exemptions for not using the State and Local Income Tax Refund Worksheet, which when I completed manually, said the refund is taxable. I used another reputable service which said they were taxable. Yet, Turbotax tells me, after twice going through the process, that my refund is not taxable. That's good for me, but shakes my confidence in Turbotax. Are there any other reasons why a state income tax refund would not be taxable?

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ReginaM

Level 12

Your state or local tax refund received in 2019 could count as income if you itemized your deductions in 2018. If you did this, your 2018 tax return would have a Schedule A. If your return doesn't have a Schedule A, then your state or local tax refund won't count as income.

I was able to re-visit this section and add a 2018 State Refund to my income, but it took a bit of work as there was a big 2018 questionnaire TurboTax went through since I didn't prepare 2018 in TurboTax. I just stepped through this questionnaire, and at the bottom of one of the screens it had a box that stated Make my whole State Refund Taxable.

You may want to re-visit this section by following these steps,

While you are in your Tax Home,
Select Search in the top right side of your screen,
Enter State Refund Taxable,
Select Go to State and Local Tax Refunds,
Select Yes,
Select State or Local Tax Refunds,
Select Continue,
Select Edit next to your refund,
Walk through all the questions, selecting Continue or Done,
Until you see the screen that says Let's see if your state refund is taxable,
Make sure all your answers are correct here.

Hopefully this helps!

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Anonymous

Thank you for the reply. I tried what you suggested. Got through steps 1, 2, and 3, but the selection "Go to State and Local Tax Refunds" did not show-up. So I was stuck there.

I, too, did not use Turbotax last year, but I did file a Schedule A. I have twice previously worked through Turbotax's questions, and I don't expect a different answer. I did see the button for the option to "Make My Whole Refund Taxable," but why would anyone choose that?

linaj20201

Level 14

Let's look at your 2018 Schedule A, line 5a. If you have the state and local income tax amount listed there, that means you took the state tax deduction. Besides, if you also itemize on Schedule A, your 2018 state tax refund will be taxable to you in 2019. You would need to report it on your 2019 tax return. However, if you chose the state tax deduction but did not itemize, you would not report it.

For more information, click here: State tax refund

@kgbachbob

hustonlh

Level 2

Some where there subtraction of deductible purchase and not accounted credit and resident of Kentucky for the total 12 month period of year 2021. Can you say how estimated wages calculated or is credit of residency donation for deposal remizing and plus factor reserve. How also that estimated kentucky value and gross to my wages of 2021 w-2 form adjustment to 0.

MichelleLO

Level 15

You are commenting on an older thread with outdated information. Do you have a specific question we can assist you with?

Also, you may want to consider starting a separate post for your question so that you get the most recent and accurate advice from the Community.

@hustonlh

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PGA1

Level 2

I know this is an old post, but I just found it by Googling the same question, so I figured I would chime in with the answer I found in case anyone else comes across it. It seems your state tax refund may be excluded from income even if you itemized on the prior year's return due to the $10,000 SALT deduction cap. The IRS explains it here: https://www.irs.gov/newsroom/with-new-salt-limit-irs-explains-tax-treatment-of-state-and-local-tax-refunds