How much of my state refund will be taxable

[Hardway]

I am filing my 2022 tax return. I live in VA which requires you to use the method of deduction you choose in your federal tax return for your state tax return. If I choose itemized deduction, I will pay more federal tax by $230 but less state tax by $800. So I am going to choose itemized deduction.

I overpaid my state estimate tax by $4000. If I choose my itemized deduction, I will receive a total refund of $4,800 from the state. Does that mean all those $4,800 are taxable income on my future 2023 tax return or only part of that is taxable? If the $4,800 is only partial taxable, how do I know how much of that is taxable? Thank you!

[Bsch4477]

See page 84. 

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

[Hardway]

Thank you for your quick reply! So the refund I will receive from VA would be $4800 and the amount of taxes I paid in 2022 is over $42800. According to the worksheet in the link, it seems none of my state refund is taxable. So it seems that if your state refund is less than your state income tax, your refund will just not be taxable? This seems too good to be true. 

Thanks again for your help.

[Hal_Al]

Q. If I choose itemized deduction, I will pay more federal tax by $230 but less state tax by $800. So I am going to choose itemized deduction.

A. That's possible but unlikely. You're, most likely, doing  something wrong.

Q. Does that mean all those $4,800 are taxable income on my future 2023 tax return or only part of that is taxable? If the $4,800 is only partial taxable, how do I know how much of that is taxable? 

A. Usually all.  But, it could be just part. You determine how much from the worksheet (which TurboTax does automatically). The portion of the state  refund that is taxable is the portion you got a tax benefit (deduction from income) from, on the federal return, in the the previous year. Usually, it's all or none.

Q. So it seems that if your state refund is less than your state income tax, your refund will just not be taxable?

A. No.  The portion of the state  refund that is taxable is the portion you got a tax benefit (deduction from income) from, on the federal return, in the the previous year. 

There is a way to avoid  claiming the state tax income tax deduction and having to pay tax on the refund, the following year.  For details, see https://ttlc.intuit.com/questions/4152717-excess-state-income-tax-withheld-for-2017-i-want-refund-fr...  

[Hardway]

Thank you！ I am also confused why choosing itemized deduction will increase my federal tax but decrease my state tax.

My itemized deduction is very close to the standard deduction, $24,320 v. $25,600. However, for VA, its standard deduction is only $18,000. If I choose itemized deduction, the deduction for VA is about $29,800. That's why I can pay less tax on VA. 

My actual state tax is way beyond the deduction I am allowed in VA. Thus, the $4,800 state refund I will receive seems is non-taxable. 

Just wondered whether anyone can confirm it? Thanks 

[Hal_Al]

Q.  My actual state tax is way beyond the deduction I am allowed on the federal return. Thus, the $4,800 state refund I will receive seems to be non-taxable.  Just wondered whether anyone can confirm it? 

A. Yes. The SALT (state and local tax) deduction limit is $10,000. So, if your total SALT was more than $14,800, your state tax refund would not be taxable because you got no tax deduction for that $4800.  The TT worksheet should confirm that.