State used 2022 funds to pay for taxes owed in 2021. Now being taxed on refund when they paid me back!

[TrboTaxFan]

I am in Maryland and the state withheld funds from my tax year 2022 refund to pay for money owed for tax year 2021.  It turns out I did not really owe the money but needed to submit additional 1099 forms for tax year 2021 showing I paid taxes.  When I did that, they refunded the amount they withheld.  Unfortunately, the 1099-G I received says the refund amount is for tax year 2021. 

The confusing part is they took the funds out of my 2022 tax refund to pay 2021 tax year and then paid me back.  As a result, when I enter the 1099-G, it says I owe taxes on the amount whereas normally I would not have since I file using standard deductions.

I don’t think I should be taxed on the amount.  Can someone explain in layman’s term why I am being taxed or how to correct it in TurboTax such that I am not being taxed?

Thanks!

[rjs · Accepted solution]

If you used the standard deduction on your 2021 federal tax return, the refund for 2021 state tax is not taxable. To avoid problems with how TurboTax handles it, don't enter the 1099-G in TurboTax at all. There is no need to enter it because you know it's not taxable. Nothing about the 1099-G goes on your 2023 federal tax return if the refund is not taxable.

[TrboTaxFan]

Great!  I was under the impression that, because I got the 1099-G that I had to enter it into TurboTax and it would automatically realize that I filed standard deduction for tax year 2021.

Thank you for your help!!