I double-checked and you are correct on the NY State return - indeed, the amount got subtracted in line 25 - so all good there.
However, still trying to understand why only 12% of my NY state refund from last year is being taxed on this year's federal? I looked at the forms as you advised and they mathematically make sense however I would like to understand why only 12% is being taxed? This amount has been quoted on an additional form called "Schedule 1" of form 1040 - something that was not there in any of my previous returns. Is this "Schedule 1" some new addition to this year's 1040? Additionally, I can see that the calculation to come up with this 12% amount was computed on a form called "State and Local Income Tax Refund Worksheet" where the full refund amount is quoted first and then, something called "Recovery exclusion from standard deduction" is being computed and subtracted from the refund amount and that's how this small number of 12% is being derived and then linked to "Schedule 1". Do you know what "Recovery exclusion from standard deduction" is?
I am just concerned that if only portion of my state refund gets taxed by IRS now, then IRS might realize I owe them tax for the rest of taxable refund and will want me to pay them back.
