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.
Even when your refund is taxable, it may not be the entire amount. It depends on how much the deduction affected your refund or tax bill.
Whether or not your state income tax refund is taxable on your federal income tax return depends on whether you took an itemized deduction (Schedule A (Form 1040)) for the tax that was later refunded.
- Don't report any of the refund as income if you didn’t itemize your deductions on your federal tax return for the tax year that generated the refund.
- If you took an itemized deduction in an earlier year for taxes paid that were later refunded, you may have to include all or part of the refund as income on your tax return. Use Worksheet 2, Recoveries of Itemized Deductions in Publication 525, Taxable and Nontaxable Income to determine the taxable amount of your state or local refunds to report on your tax return.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
