The refund is not taxable in 2018. Instead, when you report your itemized deductions for 2018 state taxes paid, reduce your deduction by the amount of the refund.
Explanation: suppose you made 3 payments of $800 in 2017, with a final payment of $800 in 2018, followed by a refund of $177 in 2018. Your actual state income tax for 2017 was $3023, you paid $2400 of that in 2017, and $623 ($800 - $177) in 2018. So, $2400 was the correct itemized deduction for taxes paid in 2017 to be reported on your federal return, and the refund is not taxable because. For your 2018 return, your state income taxes paid are $623 for the 2017 tax season that was paid in 2018, plus whatever you actually paid in 2018 toward the 2018 state taxes owed (estimated payments and withholding.)
