The general rule of thumb is:
If you didn’t deduct state and local income taxes last year, you don’t need to pay taxes on your state and local tax refund this year. For instance, if you didn’t itemize your deductions last year and instead you took the Standard Deduction, then your state tax refund from the previous year is tax-free this year.
If you transferred last year's tax data to this year's return, your state and local refunds are automatically brought over with your other tax info. So TurboTax brought over your refund from last year and used it to decide if it needed to be reported or not. That is why you see it.
TurboTax will figure out if it’s taxable or not.
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.
Just answer the questions about last year’s refund, and we’ll calculate the taxable amount for you.
Click here for information on reporting last year's state or local refund.
Click here for information on the taxability of state refunds.
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