If you took the state and local tax deduction last year and itemized, the refund will be taxable this year if the deduction benefitted (reduced) last year's tax bill. This is true even if you opted to apply the refund to this year's state or local return.
But if you took the sales tax deduction or the standard deduction last year, it won't be taxable on this year's return. It also won't be taxable if last year's return was subject to the AMT (Alternative Minimum Tax) and the refund amount was less than the amount disallowed under AMT.
After you enter last year's state or local refund in TurboTax, we'll ask followup questions to determine if it's taxable.
Tip: When you transfer last year's return over, we'll also bring over last year's state and local refunds if last year's tax file includes those returns.
