Your state refund is listed as income because it is potentially taxable income. If you itemized (as opposed to taking the Standard Deduction) and you deducted your state income tax, your refund may be taxable. Taxpayers who itemize their deductions on their federal income tax returns and receive a state tax refund must include the refund in income only if they deducted the state tax paid. Because of the $10,000 limit on itemized deductions for state income and property taxes, some itemizers are not able to deduct all of the state taxes they paid and do not need to include a refund in income.
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