Why is my last years state tax refund in my yearly income for this year?

[rjs]

If you claimed an itemized deduction for state income tax on your 2020 federal tax return, you received a tax benefit from that deduction because the deduction reduced your 2020 tax or increased your refund. But if you got a refund of part of the state income tax that you deducted, you were not really entitled to the full deduction that you took, so you got a greater tax benefit than you were entitled to. To compensate, you have to report the state refund as income on your 2021 tax return and pay tax on it. That makes up for the tax reduction that you got in 2020 that you weren't really entitled to.

In some cases you might not have gotten any tax benefit from the full amount of the state income tax deduction. TurboTax does a very complicated calculation to determine how much (if any) of the state refund actually gave you a tax benefit. That amount has to be reported as income. On your 2021 tax return, the taxable amount of your 2020 state refund is on Schedule 1 line 1.

[FangxiaL]

Sometimes the state refund amount will show up under this year's income. The refund may or may not be taxable depending how you took your deductions last year. 

Follow these steps to find out if your state refund is taxable:

1. Go to the Refund Received for state/local tax returns, click on Edit
2. On the next screen called State and Local Tax Refund Summary, click on Done
3. On the next screen, choose between standard or itemized deduction

If you took standard deduction, the state refund is not taxable. If you itemized deductions, you need to answer some additional questions, and TurboTax will help you figure out if any portion or all of your state refund is taxable. See @rjs for a good explanation about why it may be taxable.