Taxability of state refunds

[gvbachman]

I was just married in May of 2021 and we are filing jointly for the first time.  I itemized my 2020 taxes and my wife did not.  After entering our combined 2020 state withholdings and refunds the Premier versions asks whether we itemized or used the standard deduction in 2020.  How should I answer? 

[rjs]

Your wife's 2020 state refund is not taxable and does not have to be reported, because she did not itemize deductions on her 2020 federal tax return. When reporting your state refund, ignore your wife's refund and answer all the questions about the state refund as if they apply only to you. On the screen where you enter your state refund, enter only your own refund (even though it says "Total Refund Received"). A couple of screens later it asks whether you took the standard deduction or itemized in 2020. Select "I itemized my deductions in 2020." The next screen offers two choices. You can use either one. You can take the easy way out and just make the full amount of your refund taxable. Or you can select the option to enter information from your 2020 tax return. If you do that, enter the information from only your own 2020 tax return.

(Note to anyone else reading this: This solution only works because the wife took the standard deduction in 2020.)

[KrisD15]

It's a tricky calculation. 

I suggest you make the calculation on paper and claim what you need to, or use TurboTax online to start a "mock return for only you as single", enter only your refund and your 2020 itemized deductions, to get the taxable amount, if any.

Look at the instructions for line 3. 

State and Local Income Tax Refund Worksheet—Schedule 1, Line 1

IRS LINK

[LH2758]

Regarding state refund, when it asks if we itemized or took standard deduction, then is that pertaining to the state filing or the federal filing for last year? I take standard on the federal, but itemize on 

[VolvoGirl · Accepted solution]

That's for the federal return.  

A State Tax Refund is taxable if you itemized deductions on that prior year's federal return and took a deduction for state income taxes instead of the sale tax.  You got a deduction benefit for it so now you have to include it as income. If you took the standard deduction it is not taxable and you don't need to report it.