Taxable State Refund

[eislertom]

I itemized deductions on my 2017 Federal taxes. I received a tax refund from New York state. A large portion of that refund is from a Solar Credit ($5,000). This credit is not part of the Federal itemized deductions and did not reduce my federal taxes through itemization. Do I need to include that value as part of my taxable state refund even though it did not reduce my Federal taxes in any way?

[CarolynM · Accepted solution]

Unfortunately, yes. 

State tax refunds are considered federal taxable income when the are created by itemizing deductions. 

While state tax deductions are often based on a federal deductions, there are many state tax deductions and credits that are different from the federal deductions and credits. By taxing state tax refunds, the IRS is aware you a reporting income from credits/deductions that may not have reduced your previous federal taxes.

For more information on taxable income, follow this link: What is Taxable Income

[Edit 3/2/2019 8:05 AM PST]