TurboTax is saying my state refund is not taxable, but it had a direct impact on my claimed deduction, which was not limited by the $10000 local tax limit. Is this a bug?

you didn't state it specifically, but the state refund is NOT taxable if you took the standard deduction in

2018

so when you state it had a direct impact on your claimed deduction, what do you mean by that and what year are you referring to? 

I did not take the standard deduction. When I say it had a direct impact, I mean that if I hadn't deducted the amount of the refund, my taxable income line on my 1040 would have gone up by the amount of the refund.

while I understand that in 2018 you itemized, did you hit the $10,000 limit of SALT (state and local tax) deductions? There are byzantine rules to determine whether  the state refund is taxable THIS year if you hit the SALT limit LAST year. 

So even if you itemized last year, it is possible that the state refund is not taxable this year

look at the form called "st refund wks". It's in the desktop version which goes through all the math; not sure what is provided in the online version. 

Thanks. I figured out that it would be taxable because I didn't hit the state limit but itemized.

I think it was a TurboTax bug. After the desktop version downloaded an update, it said that the refund was taxable. They must have found the bug and corrected it.