If you overpay on your estimates one year to lower your tax bill, then you will likely get a refund of state or local taxes when you complete your state return. This refund then turns into taxable income in the year you receive the refund.
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 tax)
- Claiming the deduction helped you increase your federal refund or lower your tax bill
The amount that is taxable depends on how much the deduction affected your refund or tax bill. If the entire amount of overpayment lowered your tax bill, then the refund would be taxable.
@roninshawneeKS
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