State tax refunds are usually not taxable, but there are exceptions

Most of the time, a state tax refund is not taxable income on your federal return. The IRS treats it as a return of money you already paid, not as new income. However, if you claimed the state and local tax deduction (often called SALT) on your federal return in the year you paid that state tax, you may owe federal tax on the refund when it arrives.

The rule is called the tax benefit rule. It says you only owe federal tax on a state refund if you got a federal tax benefit from deducting that state tax in the first place. If you took the standard deduction instead of itemizing, or if you live in a state with no income tax, the refund is not taxable to you.

Key Takeaways

  • State tax refunds are taxable on your federal return only if you itemized deductions and claimed state income tax as a deduction in the year you paid it.
  • If you took the standard deduction, your state refund is not taxable income, even if it is large.
  • The amount you owe federal tax on is limited to the amount of state tax you actually deducted — not the full refund if the refund is larger.
  • You report taxable state refunds on Form 1040, Schedule 1, line 1, using the amount shown on Form 1099-G from your state.
  • Residents of states with no income tax never owe federal tax on state refunds because there is no state income tax to deduct.

How the tax benefit rule works

The tax benefit rule prevents you from getting a tax advantage twice. If you deducted your state income tax on your federal return, you reduced your federal taxable income. When the state refunds part of that tax, you are getting money back for an expense that already lowered your federal taxes. The IRS wants you to report that refund as income to even things out.

The key word is deducted. You only owe federal tax on the refund if you actually claimed state income tax as an itemized deduction on Schedule A in the year you paid it. If you took the standard deduction instead, you did not get a federal benefit from paying that state tax, so the refund is not taxable.

The taxable amount is capped at the deduction you actually claimed. If you deducted $5,000 in state income tax but received a $6,000 refund, you only report $5,000 as taxable income. You do not owe federal tax on the extra $1,000.

When you itemized versus took the standard deduction

Whether your state refund is taxable depends entirely on which method you used on your federal return in the year you paid the state tax. Look at your prior-year Form 1040 to find out.

If you filed Schedule A and claimed state income tax, property tax, or sales tax as an itemized deduction, your state refund is taxable. If you left Schedule A blank and used the standard deduction, your refund is not taxable. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married filing jointly.

Many people switch between itemizing and taking the standard deduction from year to year, depending on their total deductible expenses. A large refund one year does not tell you whether you itemized that year — you have to check the actual return.

Reporting the refund on your federal return

Your state will send you a Form 1099-G if your refund is $10 or more. This form shows the amount of the refund in Box 1. You use this amount to determine what to report on your federal return.

If the refund is taxable, you report it on Form 1040, Schedule 1, line 1 (labeled "Other income"). You do not report it on the main Form 1040 itself. The amount you enter is the lesser of the refund shown on Form 1099-G or the amount of state tax you deducted in the prior year.

If you did not receive a Form 1099-G but received a refund, you still report it if it is taxable. Keep your own records of the refund amount and the state tax you deducted.

States with no income tax

If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, your state has no income tax. You cannot receive a state income tax refund because you do not pay state income tax. Some of these states have other taxes (like sales tax or capital gains tax), but refunds of those are handled differently and are generally not taxable under the same rule.

If you moved to one of these states after paying income tax in another state, a refund from your former state is still subject to the tax benefit rule based on whether you deducted it on your federal return.

What happens if you made a mistake

If you reported a state refund as taxable income but later realize you should not have, you can file an amended return. Use Form 1040-X and attach a statement explaining that you did not itemize in the year you paid the state tax. The IRS will refund the federal tax you overpaid.

If you did not report a refund that should have been reported, the IRS may catch it when they match your Form 1099-G to your return. They will send you a notice with the additional tax owed, plus interest. The interest rate varies but is usually between 8 and 10 percent per year.

Frequently Asked Questions

Do I report the state refund on my state return too?

No. Your state does not tax the refund of its own tax. You only report it on your federal return if the tax benefit rule applies. Your state return is separate.

What if I received a refund but did not get Form 1099-G?

If the refund was less than $10, your state may not be required to send Form 1099-G. You still report it on your federal return if it is taxable. Keep your own records of the amount and the date you received it.

Can I deduct state income tax in the year I receive the refund?

No. You deduct state income tax in the year you pay it, not the year you receive a refund. The refund is reported in the year you receive it, and it relates back to the tax you deducted in the prior year.

If I owe state tax one year and get a refund the next, do I report both?

Yes. You report the refund in the year you receive it, following the tax benefit rule. Any state tax you owed and paid in a different year is deducted in that year, not the year of the refund.

Does a state refund affect my federal tax bracket?

Yes, if it is taxable. Reporting the refund as income increases your total income for the year, which can push you into a higher tax bracket or affect other income-based calculations like credits or deductions.