Why is it that when you receive a refund of your state taxes, you must claim it as income on the return of the year you received it, but when you pay the state additional taxes, you are not able to deduct that from your taxable income?

[DianeW · Accepted solution]

This does cause confusion so you're not alone.  A state income tax refund must be included in income if you used it in the previous year as a deduction on the itemized deductions.  And then to the extent that it actually reduced income and TurboTax will calculate that for you.

The state tax withholding will automatically carry over to the itemized deductions and if that is higher than the sales tax allowed then it is part of your overall itemized deductions.  

If you did not itemized deductions, but used the standard deduction in the previous year there is nothing to report.

• While you are logged into your TurboTax account:
• My Account > Tools > Topic Search > Type state refunds > Go
  
• Continue to make the proper entries
• Click the screenshots attached to enlarge and view for assistance