The State doesn't know if you have overpaid your state taxes until after the tax year has closed; this is why the notice comes out in the next year.
Whether or not the state tax refund is taxable depends on the answers to a number of questions, such as did you itemize last year, and how high was your Itemized Deduction total over the Standard Deduction for 2015.
In TurboTax Free, go to (Personal) Federal Taxes->Wages & Income->Other Common Income. Click on Show More.
Click on the first item in the list: "Refunds Received for State/Local Tax Returns". This will start to the interview to handle a state refund.
(Note that this navigation is for Deluxe and Premier, Self-Employed may be slightly different).
