No, you are not doing anything wrong. But you may need to go through that section and answer some follow-up questions. TurboTax will include the amount in your total income, but that does not mean it is included in your taxable income.
When you answer the follow-up questions in the 1099-G, state and local refunds, the income will be determined to be NOT taxable, but until you answer those questions, it will show as taxable. After you answer the questions and look at your Form 1040, the amount of the refund should not show up as taxable.
Only if all three of the following are true, your refund counts as taxable income:
- You itemized deductions last year, instead of taking the standard deduction
- You claimed state and local income taxes (not general sales taxes)
- Claiming the deduction helped you increase your federal refund or lower your tax bill
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