A refund of state or local income tax paid may in total or in part be considered income in the year that it is received, provided the taxpayer claimed the taxes paid as an itemized deduction on the prior year tax return.
In addition to the amount the taxpayer actually received, the taxable amount of the state or local refund includes:
- any part of the refund they chose to apply to their current year estimated tax payments.
- any part of the refund that was garnished by the state or federal government to satisfy another obligation such as back taxes, student loans, etc.
None of the state or local tax refund is taxable if, in the year the tax was paid the taxpayer either
- did not itemize deductions, or
- itemized deductions and elected to deduct state and local general sales taxes instead of state and local income taxes.
If a taxpayer received a refund, credit, or offset of state or local income taxes, they should receive a Form 1099-G. If the refund was for a tax that was paid in the year prior to the current tax year and was deducted as state and local income taxes on the prior year's Schedule A, some or all of the refund may be taxable.
A worksheet is provided in TaxSlayer Pro to determine the amount that is included in income. You can also review the State and Local Income Tax Refund Worksheet found in the Form 1040 instructions to determine the taxable portion of the refund.
However, when certain exceptions exist, the taxpayer may be required to treat the state or local tax refund as an itemized deduction recovery and use the Recoveries of Itemized Deductions worksheet in Publication 525 instead. The exceptions are as follows:
- The refund is for a tax year other than the year prior to the current year.
- The refund is for a tax other than an income tax refund, such as a sales or real property tax refund.
- QBID exceeds AGI less deductions.
- The taxpayer had taxable income in the prior year but no tax due because of the 0% tax rate on net capital gains and qualified dividends.
- The taxpayer's prior year state and local tax refund is greater than the prior year state and local income tax deduction minus the amount that the taxpayer could have deducted as the prior year state and local sales tax.
- The taxpayer made an estimated state and local income tax payment for the prior year in the current year.
- The taxpayer was subject to AMT in the year prior to the current year.
- The taxpayer could not claim all of the credits they were entitled to receive in the prior year because the total credits exceeded the tax liability in that prior year.
- The taxpayer was claimed as a dependent by someone else in the prior year.
- The taxpayer received the refund in the prior year by filing jointly with a person that they are not filing a joint return with in the current year.
To input state and local refunds from Form 1099-G, from the Main Menu of the tax return (Form 1040) select:
- State & Local Refunds (1099-G Box 2)
Note: This is a guide on entering a state or local tax refund reported on Form 1099-G into TaxSlayer Pro. This is not intended as tax advice.