You have to report the full amount the state paid out for you. Which includes the garnished amount. You still got it, it just went to something you owed. It was for your benefit.
A State Tax Refund is taxable if you itemized deductions on that prior year's federal return and took a deduction for state income taxes instead of the sale tax. You got a deduction benefit for it so now you have to include it as income. If you took the standard deduction or filed a 1040EZ or 1040A it is not taxable and you don't need to report it.
