In general, state and local tax refunds are taxable if the tax refunded was deducted a previous year and you received a tax benefit from the deduction. Refunds are partially taxable if your itemized deductions from last year exceeded your standard deduction by less than the refund amount. The state tax refund doesn't come from the IRS but from the state. If you itemized and deducted in Schedule A the amount of state taxes you actually paid this year, you have reduced your taxable income from the IRS by that amount.
First, federal tax refunds are not taxable as income. The term taxable income refers to any gross income earned that is used to calculate the amount of tax you owe. Simply put, it's your adjusted gross income minus any deduction. This includes all employers' salaries, tips, salaries and bonuses.
Investment and unearned income are also included. Unemployment compensation is considered taxable income. You must report unemployment benefits on your tax return if you are required to file them. Watch this program, you don't like it when you want to pay the lowest sales tax, even if you have a good reason not to use the state income tax figure.
If you listed the deductions in Schedule A and chose to deduct state and local sales taxes instead of deducting state income taxes paid, state refunds are not taxable. Some of those state taxes will now be returned to you in the form of a state refund and will be reported to you on Form 1099-G (state income tax refund). If you're a shareholder, profits, losses, and deductions are reported on your personal income tax return. First, you can deduct your state and local taxes, and then suddenly, the following year, you receive a Form 1099-G from your state and pay taxes on your state and local tax refunds.
If you have questions, you can connect live via a one-way video with a TurboTax Live tax expert to get answers to your tax questions. Finally, state income tax refunds may be taxable, depending on what you deducted on your previous year's tax returns. Turbotax allows you to re-calculate your previous tax by hand, even though they have all the information to do the calculations for you. To avoid any complications, use the information and tips above to ensure that you calculate and report your taxable income accurately.
Dear Tax Talk: My husband and I filed amended state (Massachusetts) and federal tax returns for the past three years. If you deducted your state and local income taxes last year and also received a state refund last year, then the state tax refund you received from the previous year may be taxable. Taxable income includes salaries, bonuses and tips, as well as investment income and various types of unearned income. Owners of sole proprietorships, public limited companies and some trusts and properties may be eligible for a qualified business income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of the QBI, dividends from real estate investment trusts (REITs) and corporations qualified publicly traded (PTP) revenues.
