"If my State tax refund was an overpayment of withholding, is it taxable?"

[fed3rd]

My State tax refund was an over payment of withholding, is it taxable?"

[HelenaC]

Yes, it may be. If you itemized in 2015, you deducted your total state income tax paid on Schedule A. Because it was an overpayment, you should not have deducted 100% of your income taxes, therefore, the amount overpaid has to be recaptured on the 2016's income tax return and taxes paid on it. 

See the following: Is My State Tax Refund Taxable and Why? | The TurboTax Blog

For itemizers, it’s one of the stranger parts of the tax code. First you get to take a deduction of your state and local taxes, then all of a sudden the next year you get a 1099-G from your state and you’re paying taxes on your state and local tax refunds. What gives?

There are times when your state and local tax refund is not taxable, though, and we’ll cover that first.

In general, if you didn’t deduct state and local income taxes last year, you don’t need to pay taxes on your state and local tax refund this year. For instance, if you didn’t itemize your deductions last year (you took the standard deduction) then your state tax refund is tax free this year.

Also, if you were able to deduct your sales tax and not your state income taxes on last year’s return, then your state refund is not taxable when you file this year.

If you deducted your state and local income taxes last year and received a state tax refund last year then your total  state tax refund  that you received from the previous year may be taxable. TurboTax will ask you simple questions about your previous year state tax refund if you deducted state taxes last year and will perform calculations to determine how much of that refund is taxable based on your answers.

[SanDieggo]

Strange indeed....   With the $10k limit on SALT  and if one had say a $2k State tax refund which they entered on SCH A line 5a along with a $12k Real estate tax.   Is there any State Tax assumed to be part of that $10k  and therefore all or part of the $2k refund will be taxable on next year's 1040?  

In this situation I'm thinkin' it would be better to enter zero on SCH A line 5a and still get the $10k deduction and not have to deal with phantom income on next year's 1040.   The withholding that caused the entry in the first place was a 1099. TT  propagates the entries onto SCH A. To zero out one has to trace back and zero out the State Tax refund  on the 1099 or do an override on SCH A line 5a or maybe tick the box and say SCH A line 5a a is Sales Tax and enter $5.      

[KathrynG3]

Yes, there is a portion of income tax paid that is considered to not have any tax advantage. TurboTax will calculate this for you if the amount is entered in full.

Keep in mind that all government forms issued to you are matched to what is entered in your return. 

See IRS Form 1040 Instructions for Schedule 1 Line 3 State and Local Income Tax Refund Worksheet

@SanDieggo

[SanDieggo]

Are you inferring that because I received a 1099-G (state tax refund) that I'm compelled to use it on SCH A line 5A?  In my case it makes no difference since I'm limited by the SALT threshold.  With or without it I still get a $10k deduction.  Without it I'm not exposed to stating it as income on my 2021 1040.   In this case I'm not altering anything I'm just choosing not to use it as a deduction item. 

[KathrynG3]

Not exactly; The IRS considers a state tax refund to mean you may have already taken a deduction and received a benefit for at least a portion of the state refund. If you did not, then there is no tax charged. If you did, then the IRS is allowed to tax the taxable portion of it. 

However, TurboTax will calculate the SALT Refund based on your entries. It is not necessary to make that determination ahead of time by only including some of the details. Since your SALT paid combined with your real estate taxes is greater than $10,000, it is doubtful that 100% or even any of the refund would be taxable anyway. But, whether or not you report the subsequent refund, it is known that you received it. Not including all the details could produce unexpected results.

Any taxable portion of a prior period state tax refund would be reported on Schedule 1, line 3. Separately, the state tax amount withheld in 2020 should be entered on the 2020 Schedule A in full.