How to Report Taxable Refunds on a 1040 Form

How to Report When State Refunds Are Taxable

Man handing woman US dollar banknotes, close-up
PM Images/ Iconica/ Getty Images

Receiving any tax refund is usually a time of pleasure and anticipation as you contemplate what to do with this “extra” money. But this isn’t always the case for all taxpayers. The IRS says that some state income tax refunds are taxable income so you must report them on your following year's tax return on line 10 if you file Form 1040.

Is Your Refund Taxable?

You may have to include 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.

If you also claimed a deduction for state and local income taxes, you must figure out the taxable portion of your state refund and report it on your federal return.

Figuring it out is pretty clear-cut, at least on the surface. If you claimed the standard deduction on your federal return last year rather than itemize your deductions, you’re clear—your state refund is not taxable.

You took the standard deduction if you filed Form 1040A or 1040EZ. These tax returns don’t allow you the option of itemizing.

If you filed Form 1040 and did not claim the standard deduction, the question becomes a bit more complicated. State refunds aren’t taxable if you itemized but 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 may “remember” this information and may even be able to calculate the right amount of your taxable refund.

Otherwise, check line 5 of the Schedule A you filed with your return, the form that lists your itemized deductions. If line 5 is blank, your refund isn't taxable. If a number appears, there should also be a notation as to whether the amount represents state and local income taxes or general sales taxes, which should be noted as “ST.” An ST notation here means your refund is not taxable.

Documents You May Need 

If you must report and pay taxes on your refund, you'll need some information to accurately complete this year's state refund worksheet. This information can be located on 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 refund you received if you did not receive a Form 1099-G
  • Your previous year's federal Form 1040 and Schedule A, which lists your itemized deductions 

Reporting the Income

You can calculate the taxable portion of your state tax refund by using the State and Local Tax Refund Worksheet on page 23 of the Instructions for Form 1040 provided by the IRS. You must file this worksheet along with your tax return.

Some people may need to use Worksheet 2, Recoveries of Itemized Deductions, found on page 26 of 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 10 of Form 1040.

NOTE: Tax laws change periodically, and you should 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. 

Continue Reading...