2021, 2022 and 2023 state tax refunds received in 2025

[Martiroy60]

In 2025 I filed amended state tax returns for the years 2021-2023 because of an income that we did not know until 2025 was not taxable to us. I had already received small refunds for those years, but filing the amended returns created larger refunds, which were all received in 2025. For my Federal tax returns for those years, I itemized my deductions. My state and local taxes were well above the $10,000 SALT cap and the refunds that I received for each year are less than the difference between what we paid and the cap, so I don't believe that there was any tax benefit to me for the refunded amount.  Do I have to include any of the refunds in my 2025 taxes? I have been reading the instructions for Schedule 1 and also Publication 525 and am not getting a clear answer.  Thank you

[robtm]

if you itemized  deductions in any year and received a state refund for that year then the refund is taxable in the year you received it on your federal return. if you used the standard deduction, then it is not taxable.

[Martiroy60]

Thank you for answering my question. While I think that your answer is generally true in most cases, you are not taking into consideration the SALT cap. The federal limit on state and local tax deductions (SALT) affects how much of your refund is taxable. For 2020-2025, the SALT cap is $10,000. If your prior deduction exceeds this cap, the portion of your refund above the cap is generally not taxable.  Basically, I didn't receive any tax benefit from the refund because I had state and local income taxes plus real estate taxes that were over the $10,000 cap and my refund didn't reduce that amount to below $10,000.

[DianeW777 · Accepted solution]

Yes, you are correct. It's called the 'Tax Benefit Rule'. You may have a portion of your state tax refund that is not taxable.  You can use the worksheet in IRS Publication 525 to determine the amount, if any, of our recovery of your state taxes is taxable for 2025.  If you click the link it will take you directly to the worksheet to determine your taxable amount.

• IRS Publication 525-Worksheet 2: Recoveries of Itemized Deductions

This will give you a way to calculate the amount and keep the worksheet in your tax file. 

@Martiroy60 

[Martiroy60]

@robtm