Is My State Tax Refund Taxable and Why?

Tax Tips Is My State Tax Refund Taxable and Why?

For itemizers, it’s one of the stranger parts of the tax code. First you get to take a deduction of your state and local taxes, then all of a sudden the next year you get a 1099-G from your state and you’re paying taxes on your state and local tax refunds. What gives?

There are times when your state and local tax refund is not taxable, though, and we’ll cover that first.

In general, if you didn’t deduct state and local income taxes last year, you don’t need to pay taxes on your state and local tax refund this year. For instance, if you didn’t itemize your deductions last year (you took the standard deduction) then your state tax refund is tax free this year.

Also, if you were able to deduct your sales tax and not your state income taxes on last year’s return, then your state refund is not taxable when you file this year.

If you deducted your state and local income taxes last year and received a state tax refund last year then your total  state tax refund  that you received from the previous year may be taxable. TurboTax will ask you simple questions about your previous year state tax refund if you deducted state taxes last year and will perform calculations to determine how much of that refund is taxable based on your answers.

Comments (32) Leave your comment

  1. I don’t believe the 2018 Federal schedule 1 line 10 worksheet for determining taxable state refunds is correct. If an extension payment is made in 2018 for 2017 state taxes, and it exceeds the amount owed, the refund should not be taxable.

  2. I overpaid my state tax in 2016 by $200 and got a refund of the overpayment. This is now listed as taxable income on my 2017 federal return. There does not seem to be any line to enter it as overpayment EXCEPT to apply it to the following year. What do I do to correct this????

    1. Hello Ann,
      If you Itemized deductions and received a State refund; then the following Tax year (i.e. 2017) the refund is considered Taxable income for Federal purposes if you choose to itemize deductions for the year you are filing.
      Thanks

      1. If I had a state refund for 2017, but did not file for the refund until 2018 and then decided to credit it towards 2018 state taxes, will it be considered Taxable Income for Federal purposes if I do not itemize deductions for 2018 due to the new laws?

  3. So we were using TT for tax returns for the past several years. We are in a high tax state (California) and hit AMT, so the state and local taxes are not deductible.

    However, it seems that TT still consider the state refund as taxable.

    Hypothetical numbers, say I got $800 state refund from California for tax year 2016. When I file 2017 return, i itemized my return but because hitting AMT the state/local taxes aren’t really deducted. Why does TT still gets me to pay tax for the $800?

  4. “TurboTax will ask you simple questions… and will perform calculations to determine how much of that refund is taxable based on your answers.”

    This is a blatant lie. Turbotax makes you re-figure your previous tax by hand even though they have all the information to perform the calculations for you. Once you arduously perform this by hand, Turbotax will then ask you to determine your tax benefit by repeating the calculation 5-6 more times to iterativley solve for the non-taxable portion.

  5. I have been searching the web for an hour trying to find the answer to the question, “WHY” is the refund from a previous year taxable in the current year. I thought based on this headline, I’d get help understanding WHY. But every article including this one simply describes WHAT and HOW, but not the reasoning behind this. The money i sent in excess of what was needed was already taxed once, as part of my total income. Why tax it again, the next year? please explain! It doesn’t make logical sense to me, but I assume there is some logic here…

  6. i deducted S&L taxes in 2017. I received a refund from the state in 2018 that I expected to be completely taxable in my 2018 federal taxes. But TT says that the taxable amount is about 7% less than that. There’s no explanation. Is this related to not choosing to deduct sales taxes in 2017?

  7. Hi, i want to ask a question instead of leaving a reply. I just received a big check from CA Franchise tax board that includes almost $6k of payments I paid in penalty and interest since I have not filed my taxes. I should only get a refund of $800 but now I have a check that includes my payments outside of my W-2 witholdings. I should not be charged taxes on it. How do I tell the CA FTB?

  8. I deducted sales tax last year and supposedly turbotax is NOT supposed to include my refund for state income tax but they are! Where are the supposed questions that determine if it is taxable?

    1. Found out that turbotax changed my sales tax to income tax because income tax was higher even though I instructed it NOT to for the very reason most of it would be taxable this year! So angry because now I would have to amend to change it to sales tax for last year. It’s going to cost me several hundred in taxes or a hassle changing it. Watch this program it doesn’t like it when you want to take the lower sales tax even if you have a good reason not to use the state income tax figure.

      1. Hi Shelby,
        TurboTax does choose the option that maximizes your deductions, but you also have the option to pick the sales tax deduction or state income tax. Sorry you didn’t see the option to choose. You can amend your taxes for free and TurboTax will walk you through amending.
        Thank you,
        Lisa Greene-Lewis

  9. I calculated my taxes deducting state taxes and then not deducting and with the AMT when I deducted, it ended up being less total tax if I did not deduct the state tax even ignoring that if I deducted then I will have to pay tax next year on my refund so double taxation (you get taxed on the state taxes once under the AMT then again next year when you have to list the refund as income). So it might make sense to elect not to deduct your state taxes on Schedule A.

  10. Basically, you take your time- do your homework as the tax law allows to determine your actual legal deductions, instead of taking a low ball government estoimated “STANDARD” deductions and get unfairly taxed over the lazy (standard) deduction folks – how is that fair?

    1. One more thing! Why do people deserve a STANDARD deduction anyways in the first place, instead of what their actual EXPENSES are? Aren’t these people “legally” ripping off the system from thousands of EXEMPT dollars not being contributed towards the common good? Must have been some slick carpet-bagger lawyer/politician that got voted into office for coming up with that one!

    2. One last thing! Why can’t citizens just post a bond (US Treasury Bonds earning interest) in a Escrol account for their next years estimated taxes, thus no weekly deductions taken out an used interest free by the MAN!

      Up in NY, if you can put down such a Bond for your Car insurance, no need to buy a car insurance policy, and make monthy payments to some carpet-bagger company! So, why not do that with income taxes too!

      Now, sue for that too – and make it a HAT-TRICK of a litigation in Small Claims court!

      That would set a precedence for the Country, and no stinking (tax loop-hole and their rich friends) politicians needed to vote on it!

      What the conntry needs is a simple 10% FLAT t6ax across the board tax system…

      Can I get a “TRUE DAT”?

  11. I paid my Federal tax first, then the state tax and then the local tax. I overpaid the local tax by $50.00 and I got 1099-g in the mail from local tax. I don’t get it. I already paid on this by paying federal first since I am self employed and I use only standard deduction. Does this mean I still have to file and pay this 1099-g? If not, then what do I do with it?

  12. We paid AMT in 2012. We received a state tax refund in 2013 due to over payment of state tax in 2012. Is this refund taxable in 2013? Turbo tax says so but I beg for differ.

    Quote from Turbo tax blog:

    In general, if you didn’t deduct state and local income taxes last year, you don’t need to pay taxes on your refunds this year. For instance, if you didn’t itemize your deductions in 2006 (you took the standard deduction) then your state refund is tax free this year.

    http://blog.turbotax.intuit.com/2007/02/24/is-my-state-tax-refund-taxable-and-why/

    My reason is since we paid AMT in 2012, our state tax was not deductible, therefore the refund should not be taxed.

    Anyone can confirm my reasoning here? Thanks.

  13. I don’t understand why state tax refunds should be taxable. Here’s what happens:
    – In year 1, you OVERestimate the amount of taxes, so you give the IRS more money that you should. This money is already being taxed because it’s part of the reported income.
    – In year 2, you get back the portion you OVERpaid and that the IRS had in its possession and made use of.
    – Then, you get taxed on that refund which was money already taxed in year 1, and that you didn’t even get to have and use. You had to overpay because you get penalized if you underpay.
    Something is very very wrong here. To summarize:
    – If you overestimate tax payment, you get penalized (double taxed).
    – If you underestimate tax payment, you get penalized (actual fee).
    – There is no way to predict the EXACT amount of taxes due. If there is one, the IRS should tell us what it is.
    What’s a taxpayer to do? Why can’t they change these ridiculous tax codes to make them simpler and fairer? This makes the IRS look like crooks.

    1. State tax refund is not from the IRS but from the State. If you itemized and deducted on Schedule A the amount of State Taxes that you had actually paid this year you have reduced your IRS taxable income by that amount.

      Now you are getting some of that State Taxes paid back in form of a refund from the state and gets reported to you on 1099-G form (State Income Tax Refund). This refund is always paid to you in a later year or two depending on how late you filed your State Return.

      The year in which you receive this refund, IRS is claiming that you had already reduced your IRS taxable income by part of the refund amount. So they basically want you to now report it as taxable income when received. This is not taxable by the State but only IRS.

      Most tax filing programs like Turbo Tax will automatically calculate the taxable portion if you enter the amount decalred on the 1099-G form.

    2. This makes NO SENSE!

      I simply had “more” withheld—already paid taxes on this amount in 2012. Rather than have to pay in at the end of the year, i had it with-held at a higher rate so I wouldn’t have to pay in. Now, money that I have ALREADY BEEN TAXED ON IN 2012, I am being DOUBLE TAXED (have to pay taxes on it again in 2013)—that is wrong and that is corrupt on part of the government!

      How can I change that? I didn’t receive that as a “refund”–I legitimately paid in more than I should have–so I should not be taxed twice! The money that I received “back” in the form of a “refund” was money that I was paid in “extra”—not money that was given back as part of deductions, etc.

      What gives? And, HOW do I change that on Turbo tax?

      1. you can always go in and manually change that figure to -0-. but the irs will probably send you a bill, because its reported on 1099-g

      2. I am facing this exact problem. I received a letter from the IRS stating, that the state reported I had received a $1200 refund check in 2013 for overpayment of my state taxes. Now my $1200 dollars is considered a extra income that has been added to my total income for that year (2013). So now they sent me a letter stating I owe them federal taxes on that money. I called the IRS number that sent me the 1099 and the lady that answered the phone would not explain the reason why I owe, but that I could answer yes or no to the form and send it back with my reasoning on why I did not think I owed with the proper paperwork to support. I explained to her that this was a refund for overpayment, but she would not answer why I had to pay money again. I received this letter on the 4th of Apr 2015 and if I don’t pay the taxes on it by the 29th of Apr 2015, I would have to pay the interest, plus a penalty. The IRS is out of control. The lady said i should have put it down on my paperwork. i told her i don’t do my state taxes at the same time i do my federal taxes. I don’t understand why I am being double taxed for monies I’ve already been taxed for. Beware of this happening to you

  14. I understand that the state refund is taxable, but the line underneath it, the Cca refund saying that I received 6000 dollars is beyond comprehension

  15. My federal tax bracket was lower in 2011 than 2012. But I received a state refund in 2012 for my overpayment of state taxes in 2011. Do I have to pay taxes on the refund at my higher 2012 tax bracket rate or is there some way to pay it at my lower 2011 tax bracket rate?

  16. Hi Don, Check out the latest version of IRS Pub 525. The last paragraph on page 22 is an example that talks about making payments over two years for the same tax return…. hope this helps.

  17. Your tip applies to my 2009 return because some of my 2008 state tax was refunded. TT reduces my 1040 line 10 amount because some of my 2008 state tax payment was made in 2009. Is that kosher? Another tax program puts the full amount of the refund on line 10. I don’t see that IRS Pub 525 p. 23 allows a reduction because some payment was in 2009, but maybe I’m misreading it.

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