Form 1040- schedule 1, State and Local Income tax refund Worksheet.

[libremente]

In 2017, I claimed general sales tax for the state income deduction and received a refund.

On this worksheet, turbotax remembers that I used general sales tax, instead of income tax, and checks the appropriate box for line C. 2.

While the instruction says there is no need to complete the remainder of the form if C2 is checked, turbotax goes on to calculate the portion of my state refund which is taxable.

This would seem to be an error.

During the step by step process, when I entered the state refund, it seemed turbotax did not remember at that time I used general sales tax as the deduction triggering the rebate and added the refund to my income.

Of course, there is always the possibility that cockpit error during my input has caused this.

Any ideas?

[NCperson]

if you itemized your deductions in 2017 then any state refund is taxable in 2018  (your took too much in state tax deductions in 2017 as represented by the refund)

if you took the standard deduction in 2017, then any state refund is not taxable in 2018 

it's really that simple. 

[libremente]

Thanks for the straightforward reply.  In the past, state taxes disallowed federal itemized deductions for state income tax. However, if the federal itemized deduction was for general sales tax then the state would allow you to deduct it from state and that would increase your state refund. Perhaps the new tax law changes this? I know state tax deductions are now limited to $10K max per married couple.