How to handle state tax refunds from prior tax years

[StarGirl18]

Thanks Tom,

That is what I was thinking, but wondering why "TurboTax Premier" did not ask whether I itemized in 2019, like it asked for 2021.  Flaw in software?  It took the 2019 refund into the "State and Local Income Tax Refund Worksheet"  Schedule 1, Line 1, Part VII State and Local Income Tax Refunds from 2019 or Prior Year Tax returns, Line 36 saying that amount is taxable.  So I questioned my logic.

[ThomasM125]

I can't see your return so I can't speculate on why the refund showed up in the worksheet. However, there should be questions there to determine if the refund is taxable, so you should arrive at the correct result if you answer the questions in the program.

@StarGirl18 

[StarGirl18]

Thanks for answering.  There were no questions for a prior year tax refund, just for last year.  The IRS states to report it on your taxes in the year you receive it, which was last year.

[DianeW777]

We appreciate the suggestion and adding information here is exactly the right action.  The information provided earlier will allow you to enter the taxable amount so that you can accurately reflect that in your tax return. I will place the worksheet here for your convenience.

• Here is the IRS State and Local Tax Refund Worksheet for your convenience.

@StarGirl18

[StarGirl18]

Thanks Diane,

But that link is 2017 worksheet?  If I amended 2019 and then received a state refund, wouldn't I fill out the 2019 worksheet.  And why doesn't turbotax do this for me?  Isn't it a simple question whether you itemized or took the standard deduction in 2019.  TurboTax worksheet  State and Local Income Tax Refund, just enters it into Part VII, taxable.  Don't understand.

[AmyC]

Since you did not itemize in 2019, your 2019 refund is not taxable in 2021. If you had itemized, then the issue of did you deduct state and local taxes paid or did you deduct sales tax or neither would come into question. The many experts above have already addressed what to do in each of those instances. Only the instance where you deduct state and local taxes and then receive that portion as a refund becomes taxable- when received.

@StarGirl18

[budro2]

Two things: 1) I don't get the window you posted a picture of when I enter the state refund amount from 2019 and 2) TT just allocates the entire amount as taxable..In my case only a small fraction of the state refund should be taxable.  This seems to indicate a huge flaw in the TT software.  A I missing something?

[JulieS]

After you enter a state refund from a prior year, there is a follow up screen to determine if it is taxable.

1. Select Federal on the left side.
2. Select Income & Expenses toward the upper left.
3. Find Refunds Received for State/Local Tax Returns on the list and click Edit to the right.
4. The next page will be Tell us about your refund.
5. Enter your information.
6. When you click Continue, it takes you back to the summary. Click Done.
7. The next screen, Refunds From Years Prior to 2020, gives you the opportunity to show the amount is not taxable, but it defaults to taxable. See the image below. 
8. If your refund is not taxable enter 0 in the Taxable amount box. 

[tomboymantax]

In doing my 2022 tax return, I had the exact same problem.  For a state refund from tax year 2021, turbotax asked if I itemized in 2021 (I answered NO and the refund was not included in taxable income for 2022).  But when I entered my state refund for tax year 2019, turbotax asked nothing and included the refund as taxable income (I did not itemize in 2019).  I reviewed the turbotax "State and Local Income Tax Refund Worksheet" and for no good reason I can see,  Worksheet Part VI classifies  the 2019 refund as "taxable."  When I chatted with Turbotax about this the Virtual Agent said I could talk to someone if I "upgraded" and paid to do so.  

Next year i will "upgrade" to a different tax software.    

[DianeW777]

If you did not itemize your deductions in any of the years for which the state refunds were received, do not enter them in your tax return.  None of them are considered taxable if they were not used to reduce your income using itemized deductions.  Keep the document(s) with your tax file.

Whenever you have questions our tax experts are always here to assist.

@tomboymantax 

[HausofPain]

This still hasn't been fixed in TurboTax Premier 2023.  My 2021 state tax refund was delayed until January 2023. I received a 1099G and entered it using "I'll Choose What to Work on."  I did not itemize deductions in 2021 but was never asked by TurboTax if I itemized deductions in 2021. The refund was automatically included in my income. Perhaps the bug only happens when the 1099G is entered without going through the guided instructions. 

The previous post recommended that if a 1099G was received and is not taxable, then it should not be entered but filed with your records.  This is NOT acceptable!  This is a bug in TurboTax and needs to be fixed!  If a taxpayer receives a 1099G, it should be entered and TurboTax should be guiding the taxpayer to determine whether the amount is taxable as income or not.

[venus024]

It's crazy that Turbotax still has not fixed this issue in 2023!