State Tax Refund: Is It Taxable?

Find out if your refund is part of your federal taxable income in just a few steps.

The First Question to Answer:

Which deduction method did you choose on last year's federal tax return?

Conclusion: Your Refund is Not Taxable.

Since you chose the standard deduction last year, you did not receive a tax benefit from deducting state income taxes. According to the 'tax benefit rule,' the recovery of an amount that did not provide a prior benefit is not included in taxable income. Even if you received a Form 1099-G, you do not need to report this amount on your tax return.

Itemized Deduction Analyzer

Please enter the following items by referring to last year's tax return (Form 1040, Schedule A).

1. State/local income tax refund (from Form 1099-G)

2. State/local income taxes you deducted last year

3. Your total itemized deductions last year

4. Your standard deduction for last year

Remember the $10,000 SALT Limit!

If your property taxes alone met the $10,000 deduction limit last year, it's likely you received no tax benefit from your state income tax deduction. In this case, your refund may not be taxable.

Analysis Result: Taxable Refund Amount

$0.00

Frequently Asked Questions (FAQ)

This principle, codified in IRC §111, states that you only include a recovered amount in gross income if you received a tax deduction for it in a prior year. If the deduction didn't reduce your tax, the refund isn't taxable. It's a matter of tax fairness.

Introduced by the TCJA in 2017, this limits your deduction for state and local taxes (property plus income or sales tax) to $10,000 annually. If your property taxes were $12,000 and state income taxes were $5,000, your SALT deduction is capped at $10,000. In this case, since property taxes alone exceeded the cap, you effectively received no federal tax benefit for the $5,000 in state income taxes. Therefore, a subsequent state income tax refund would not be taxable.

When itemizing, you can choose to deduct state general sales tax instead of state income tax. If you did this, you didn't deduct state *income* tax, so any state *income* tax refund you receive is not taxable because you received no prior tax benefit for it.

The taxable amount is the **smallest** of the following three amounts:

• 1. The total refund you actually received.
• 2. The amount of state/local income taxes you deducted in the prior year.
• 3. The amount by which your total itemized deductions in the prior year exceeded your standard deduction.

This app's calculator applies this logic automatically.

"Bunching" is a strategy for taxpayers whose itemized deductions are close to their standard deduction. It involves concentrating controllable deductions (like charitable gifts or the 4th quarter state estimated tax payment) into one year to exceed the standard deduction, and then taking the standard deduction in the next. This maximizes your total deductions over two years. It's an advanced strategy of timing expenses to actively engineer your tax outcome.

© 2024 Interactive Tax Analyzer. This material is for informational purposes only and should not be considered tax advice.