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—"sometimes" being the operative word. You must report them on line 1 of Schedule A of Form 1040, but only 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 any double-dipping here. You can't claim a deduction for your state income taxes and later receive a tax-free refund as well. You must effectively adjust the amount of your refund to account for the deduction you previously claimed.
When Is a State Refund Taxable Income?
You might 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. It depends on whether 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 last year, and 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, and 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. The cap is effective from 2018 to 2025.
Narrowing It Down: Did You Claim the Standard Deduction?
This question used to be easier. Forms 1040A or 1040EZ for the 2017 tax year were still in effect when you filed 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 are obsolete beginning with tax year 2018.
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. If you completed Schedule A, you itemized. It's that simple. If you didn't, you claimed the standard deduction and 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 tax year. You almost certainly itemized if any other number appears here.
Deducting Sales Taxes Instead
This brings us to the second rule. Did you deduct sales taxes or income taxes? 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.
If you’re using the same software program you used last year, it might “remember” this information and even be able to calculate the correct amount of your taxable refund.
Otherwise, look at line 5a of your 2019 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.
After you calculate the taxable amount, state refunds are reported on line 1 of Schedule 1 of the new 2019 Form 1040, then the total from Schedule 1 is transferred to line 9 of the 1040.
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. "Tax Year 2019: 1040 and 1040-SR Instructions." Accessed March 3, 2020.
Internal Revenue Service. "Topic No. 503 Deductible Taxes." Accessed Feb. 12, 2020.
Internal Revenue Service. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds." Accessed Feb. 12, 2020.
Internal Revenue Service. "About Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents." Accessed Feb. 13, 2020.
Internal Revenue Service. "About Schedule A (Form 1040), Itemized Deductions." Accessed Feb. 13, 2020.
Internal Revenue Service. "2018 Instruction 1040," Pages 32-34. Accessed Feb. 13, 2020.
Internal Revenue Service. "2018 Instruction 1040," Page 35. Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Instructions for Schedule A (Rev. Jan. 2020)," Page A-4. Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Schedule A (Form 1040 or 1040-SR)." Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Instructions for Schedule A (Rev. January 2020) (2019)." Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Publication 525," Page 26. Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Publication 525," Page 12. Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Form 1040," Page 1. Accessed Feb. 13, 2020.
Internal Revenue Service. "2019 Schedule 1 (Form 1040 or 1040-SR)." Accessed Feb. 13, 2020.
Internal Revenue Service. "Instructions for Form 1099-G (2020)." Accessed Feb. 13, 2020.