When is a 2023 California individual tax return refund considered taxable income in 2024? I'm running my final 2024 tax return projections. Thank you

[Bsch4477]

The refund is taxed to the extent that you itemized deductions and included state income tax paid as a deduction in 2023.

[VolvoGirl]

A State Tax Refund is taxable if you itemized deductions on that prior year's federal return and took a deduction for state income taxes instead of the sale tax.  You got a deduction benefit for it so now you have to include it as income. If you took the standard deduction it is not taxable and you don't need to report it.

[lynnfelske]

So let's say I had a $5,000 state tax refund from my 2023 individual state tax return.  Estimate 2024 itemized decutions are $30.000 .  Then is the $5,000 federal individual taxable income in 2024?    I ran this thru my 2024 proforma indivdual federal taxes and it reflected the $5,000 is not 2024 federal taxable income.

[VolvoGirl]

But what was your 2023 federal return?  Did you itemize deductions on 2023?

[lynnfelske]

Yes, I itemized deductions in 2023.  Please clarify what is meant by, "But what was your 2023 federal return?

[Bsch4477]

The calculation of the tax on your state refund involves only the data from your 2023 return. 

If you itemized and chose state and local income taxes, your state refund is taxable. However, it’s only taxable to the extent that it’s more than the refund you would have received by choosing the larger refund from these:

• Standard deduction
• General sales tax

[rjs · Accepted solution]

The state income tax refund is not necessarily all taxable or all not taxable. It's only taxable to the extent that the deduction actually reduced your 2023 federal tax. You might not have gotten the full benefit of the deduction if one or more of the following occurred.

• Your total itemized deductions exceeded your standard deduction by less than the amount of the state tax refund.
• Your deduction for state and local taxes was limited by the $10,000 cap ($5,000 if married filing separately).
• If you had not deducted the amount that was later refunded, your deduction for state income tax would have been less than your deduction for sales tax.

In any of those situations, only part of the state tax refund will be taxable. The calculation of the taxable amount is very complicated. Fortunately you don't have to calculate the taxable amount yourself. TurboTax will do the calculation for you. Just enter the 2023 refund in your 2024 tax return and proceed through the questions. Enter the information from your 2023 tax return when TurboTax asks for it. TurboTax will tell you how much is taxable, if any, and it will put the taxable amount in the proper place in your tax return.

@lynnfelske