Protecting my federal refund from state taxes.

[Rhymeswithbrownie]

I will receive a large refund on my 2019 federal taxes due to an electric car rebate. Since this will appear as income in 2020 on my state taxes (Minnesota), is there any action I can take to reduce that impact. I am retired, so I don't think investing in a ROTH IRA will be an option.

[SusanY1 · Accepted solution]

Your federal tax refund is not income on your state tax return.

The opposite can be true in some cases (your state refund can be taxable on your federal), but that only applies if you deducted those taxes on the prior year's tax return. 

You can safely enjoy your electric car tax credit without worry about an impact on your Minnesota taxes next year!

[Opus 17]

 Unless Minnesota is one of the states that allows a deduction for federal taxes. I don’t have the list but I know that some states do allow a deduction for federal taxes on the state income tax return. 

Anytime that you receive a rebate or reimbursement or refund of a tax deduction, that properly becomes taxable income. It is typically called a “taxable recovery”.   If your state allows you to deduct federal income taxes on your state tax return and you do take the deduction, then any federal refunds are taxable income.  If your state allows a deduction for federal taxes but you don’t take the deduction, perhaps because you use the standard deduction instead, then the refund will not be taxable.

 If the refund is taxable, there is not much you can do to reduce the tax impact after December 31. The only options I can think of are to contribute to a traditional IRA or a health savings account if you are eligible. 

[Rhymeswithbrownie]

Thank you. 

[Rhymeswithbrownie]

Thank you