Is interest received as part of a state income tax refund taxable?

[VolvoGirl · Accepted solution]

Yes.  You need to enter it under Interest like if you got a 1099int for it and put the interest in box 1.

[dag121]

Why? Isn't the interest paid from a state government obligation?

[rjs]

The term "obligation" is somewhat ambiguous. It normally means a bond issued by the state, though it can sometimes mean other types of obligations. Here are two statements from IRS Publication 550.

"Interest on some state or local obligations is taxable." (page 12)
"Interest you receive on tax refunds is taxable income." (page 6)

[LudwigVan_fan]

26 USC 103 specifically mentions/state state or local bonds.  Interest on a late tax refund is not a bond or other acceptable obligation

[reyna8]

do we record interest received as part of a state income tax refund in schedule B?

[rjs]

@reyna8 - As VolvoGirl said above, you enter the interest in TurboTax as if you had gotten a Form1099-INT with the interest in box 1. TurboTax will report it in the appropriate place in your tax return. Schedule B is only included in your tax return in certain cases.

[reyna8]

In the "Received from" field in TurboTax , do I write  Internal Revenue Service? Thanks

[VolvoGirl]

No. You put down who paid you. Sounds like it was from your state. Just put State of .... interest.

[reyna8]

And if it was State of California, I put California Franchise tax Board, right? Thanks much VolvoGirl

[VolvoGirl]

Yep that's what I put down on mine from California.