Is Your State Tax Refund Taxable? How to Figure It Out
The rules are the same but tax returns have changed
State income tax refunds can sometimes be taxable income, according to the IRS. You must report them on line 1 of Schedule 1 of the 2019 Form 1040—the return you'd file in 2020—if you claimed a deduction for state and local taxes the year before. A lot of taxpayers will dodge having to claim their refunds as income thanks to this rule.
The IRS is basically preventing double-dipping. You can't claim a deduction for your state income taxes then later receive a tax-free refund of the same money as well. You must effectively adjust the amount of your refund to account for the deduction you previously claimed.
When a State Refund Is Taxable Income
You would have to report the state income tax refund you received last year on your federal income tax return if you itemized your deductions on your federal return last year, and if you claimed a deduction for state and local income taxes.
You couldn't possibly have itemized and claimed a state and local income tax deduction if you claimed the standard deduction on your federal return, so your refund isn't taxable if you took the standard deduction.
The State and Local Tax (SALT) Deduction
You might also be safe from claiming your state tax refund as income if you did itemize but you didn't take an itemized deduction for state and local income taxes.
This might be the case if you elected to deduct state and local sales taxes instead. You have that choice—you can deduct either income taxes or sales taxes, but not both. Your refund is only taxable if you took a deduction for state and local income taxes.
The Tax Cuts and Jobs Act (TCJA) put a cap on how much you can claim for state and local taxes. It's $10,000 as of 2018.
How to Know If You Itemized
Forms 1040A or 1040EZ for the 2017 tax year were still in effect when you filed your taxes in 2018. You claimed the standard deduction if you used either of these returns in that tax year because they didn't give you the option of itemizing. But Forms 1040A and 1040EZ were eliminated from the tax code beginning in tax year 2018, so you might have itemized if you filed Form 1040 for 2018.
Look at your return to see if it includes a Schedule A. This is the form used to calculate your itemized deductions, so you itemized if you completed Schedule A and it's included. You claimed the standard deduction if you didn't file Schedule A, so you're in the clear.
You should also be able to tell if you itemized by checking line 8 of your 2018 Form 1040. You almost certainly claimed the standard deduction if you entered $12,000, $18,000, or $24,000 in this space. These were the standard deduction amounts for the single, head of household, and married filing jointly taxpayers in that year. You almost certainly itemized if any other number appears here.
Deducting Sales Taxes Instead
Now you must determine if you deducted sales taxes or income taxes. Remember, state refunds aren’t taxable even if you did itemize if you opted to deduct state and local sales tax instead of state income tax.
Look at line 5a of your 2018 Schedule A. Your refund isn't taxable if the box here is checked. The IRS wants you to indicate by checking the box at line 5a if you're deducting sales taxes rather than income taxes, and there's no correlation between taking a sales tax deduction and your state tax refund.
Reporting the Income
You must figure out the taxable portion of your state refund so you can report it. You can do this using the Itemized Deductions/Schedule A Worksheet included in the instructions for Form 1040 provided by the IRS. You must file this worksheet along with your tax return.
Some people might have to use Worksheet 2, "Recoveries of Itemized Deductions," found in Publication 525 provided by the IRS. This worksheet is used when a taxpayer was impacted by the alternative minimum tax in the previous year and under a few other circumstances. It’s also used if you received reimbursements for any other itemized deductions you took in previous years.
State refunds are reported on line 1 of Schedule 1 of the 2019 Form 1040 after you calculate the taxable amount, then the total from line 22 of Schedule 1 is transferred to line 8a of the 2019 Form 1040.
There are some significant differences between the 2018 and 2019 Forms 1040 and their associated schedules. Use the 2019 tax return when you're filing for that year in 2020.
Your tax software program might “remember” this information and even be able to calculate the correct amount of your taxable refund if you’re using the same program you used last year.
Documents You Might Need
You'll need some information to accurately complete the state refund worksheet if you must report and pay taxes on your refund. This information can be located in a few documents:
- Form 1099-G from the state or states that sent you refunds
- Your previous year’s state tax return, which shows the amount of the refund you received if you didn't receive a Form 1099-G
- Your previous year's federal Form 1040 and Schedule A, which lists your itemized deductions
Is Your State Tax Refund Taxable? Answer These 3 Questions
- Does your tax return include a Schedule A?
This means you itemized, so you might have to report your state tax refund as income.
- Does line 8 of your 2018 Form 1040 say $12,000, $18,000, or $24,000?
You probably claimed the standard deduction rather than itemizing, so your state tax refund most likely isn't taxable. The number that appears here will also appear on Schedule A if you itemized, so check to be sure.
- Is there a check in box 5a of your 2018 Schedule A?
This means you deducted sales taxes, not state income taxes, so you don't have to report your refund as income.
Note: Tax laws change periodically, and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice. Please consult with a tax professional if you're still unsure whether you must report your state refund as taxable income.
IRS. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds." Accessed July 2, 2020.
Internal Revenue Service. "Topic No. 503 Deductible Taxes." Accessed July 2, 2020.
Internal Revenue Service. "All Taxpayers Will File Using 2018 Form 1040; Forms 1040-A and 1040-EZ No Longer Available." Accessed July 2, 2020.
Tax Foundation.org. "2018 Tax Brackets." Accessed July 2, 2020.