If your Federal itemized deductions last year were close to the Standard Deduction for your filing status, then that amount of State refund that is taxable is only the amount that gets you down to Std Deduction you could have used.
Example:
1) Say You filed MFJ for 2016, and had $13,000 of itemized deductions in 2016 (and used state income taxes paid as part of those deductions).
2) In 2017, after you filed your 2016 State taxes, you received $1000 back as a state Refund.
3) Then, only $400 of the $1000 state refund is used as new Fed-taxable income, because that is the amount of the refund that takes you down to the 12,600 Std Ded you could have used for 2016 had your itemized deductions been lower.
Contrast that to using say 15,000 of itemized deductions in 2016, with the same $1000 state refund.....then the entire $1000 becomes Fed taxable in 2017 since 15,000 - 1000 = 14000 which is still above the MFJ Std Ded for 2016
____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*
