Learn How to Report Taxable Refunds on a 1040 Form

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

Receiving a tax refund is usually a time of pleasure and anticipation as you contemplate what you'll do with the “extra” money. But this isn’t always the case for all taxpayers – some may have to wonder how much that refund will end up costing them. The Internal Revenue Service says that some state income tax refunds are taxable income. You must report them on your tax return on line 10 of Form 1040 the following year.

 

Find out if Your Refund is Taxable

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

The rule is pretty clear, at least on the surface. If you claimed the standard deduction on your federal return last year, this means you didn't itemize so you’re in the clear. Your state refund is not taxable. But if you didn't claim the standard deduction, the question becomes more complicated. 

Claiming the Standard Deduction

If you filed Form 1040A or 1040EZ last year, you claimed the standard deduction. These tax returns don’t give you the option of itemizing.

Otherwise, if you filed Form 1040, however, you may have itemized.

Look at last year's tax 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. 

You should also be able to tell if you itemized by checking line 40 of your 1040. If you entered $6,300, $9,300 or $12,600 in this space on your 2016 return, you almost certainly claimed the standard deduction.

These were the standard deduction amounts for single, head of household and married filing jointly taxpayers respectively in that tax year. But don't leave it to chance. Reach out to the IRS for a full transcript or copy of your tax return so you can be sure. Schedule A should be included if you itemized. 

Deducting State and Local Sales Taxes Instead

This brings us to the second rule. State refunds aren’t taxable even if you itemized if you opted to deduct state and local sales tax instead of deducting state income tax. Your refund is only taxable if you took a deduction for state taxes last year. 

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, look at line 5 of your Schedule A. If line 5 is blank, your refund isn't taxable.

If a number appears there, there should also be a notation as to whether the amount represents the state and local income taxes or general sales taxes. These general sales taxes should be noted as “ST.” If ST appears here, it means your refund is not taxable.

Documents You May Need

You'll need some information to accurately complete this year's 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 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.