State tax refunds are usually not taxable on your federal return, but the rule depends on whether you itemized deductions the year you paid the state tax

A state tax refund is taxable income on your federal return only if you claimed the state tax as a deduction on your federal return in the year you paid it. If you took the standard deduction instead, your state refund is not taxable. The IRS calls this the tax benefit rule—you only owe federal tax on a refund if you got a federal tax benefit from paying the original state tax.

Most people take the standard deduction, which means most state refunds are not taxable. But if you itemized deductions on your federal return the year you paid the state tax, you deducted that state tax payment from your federal income. When you get the refund, the IRS treats it as recovering a deduction you already claimed, so it becomes taxable income in the year you receive it.

Key Takeaways

  • State tax refunds are taxable on your federal return only if you itemized deductions and claimed the state tax as a deduction in the year you paid it.
  • If you took the standard deduction the year you paid the state tax, your refund is not taxable, even if you itemize in the year you receive the refund.
  • You report a taxable state refund on Form 1040, line 1, as part of your income for the year you receive it.
  • The IRS sends you Form 1099-G if your refund is over $10, which shows the amount you must report.

How the tax benefit rule works

The tax benefit rule prevents you from getting a tax advantage twice. Here is the sequence: In Year 1, you pay state income tax. On your Year 1 federal return, you itemize deductions and deduct that state tax, which lowers your federal taxable income. In Year 2, you receive a refund of some of that Year 1 state tax. The IRS sees that you already got a federal tax benefit from that money, so in Year 2 it becomes taxable income on your federal return.

The rule only applies if you actually received a federal benefit. If you took the standard deduction in Year 1, you did not deduct the state tax, so you got no federal benefit from it. When the refund arrives in Year 2, there is nothing to recover—the refund is not taxable.

This is why the year you paid the tax matters more than the year you receive the refund. A refund you get in 2024 is taxable only if you itemized and deducted state tax on your 2023 federal return, not because of what you do on your 2024 return.

When you must report the refund on your federal return

If your state refund is taxable, you report it on Form 1040, line 1, as part of your total income for the year you receive it. You do not need to file a separate form—line 1 is where all refunds go.

The IRS will send you Form 1099-G if your refund is $10 or more. This form shows the amount of the refund and the tax year it relates to. You should receive it by January 31 of the year after you get the refund. Keep it with your tax records, but you do not mail it to the IRS—it is for your information and the IRS's records.

If you receive a Form 1099-G but you took the standard deduction the year you paid the tax, you still do not report the refund as income. You can attach a note to your return explaining that you did not itemize in the prior year, though the IRS does not require it. Many people report the refund anyway to match the Form 1099-G, which is also acceptable.

Refunds from state tax credits versus state income tax

State refunds fall into two categories, and only one is subject to the tax benefit rule. A refund of state income tax you overpaid follows the rule described above. But a refund from a state tax credit—such as a child tax credit, earned income credit, or property tax credit—is handled differently.

Refunds from state tax credits are generally not taxable on your federal return, even if you itemized deductions, because they are not a recovery of a deduction. They are credits you earned through your income or circumstances. Your Form 1099-G will show both types of refund separately, so you can tell which is which.

What to do if you are unsure whether you itemized

If you do not remember whether you itemized or took the standard deduction in the year you paid the state tax, check your prior-year federal return. Look at Form 1040, Schedule A. If Schedule A is attached and has a number on the line labeled "Total itemized deductions," you itemized. If Schedule A is not there, or if the line is blank, you took the standard deduction.

You can also contact the IRS at 1-800-829-1040 or log into your IRS account at IRS.gov to view your prior-year return. Many tax software programs also let you pull up old returns if you filed electronically.

State refunds and your federal tax bracket

If your state refund is taxable, it is added to your other income for the year you receive it, which may push you into a higher tax bracket. The amount of federal tax you owe on the refund depends on your total income that year and your filing status.

For example, if you are single and your taxable income before the refund is $45,000, and you receive a $2,000 state refund, your new taxable income is $47,000. The refund is taxed at whatever marginal rate applies to that additional $2,000—which could be 12 percent or 22 percent depending on the 2024 tax brackets and your other income.

Frequently Asked Questions

Do I have to report a state refund if I did not receive a Form 1099-G?

If your refund was under $10, the IRS does not require a Form 1099-G. You still owe federal tax on it if you itemized in the year you paid the state tax. However, without the form, the IRS may not know about the refund, so the risk of audit is lower. It is still correct to report it.

What if I itemized in the year I got the refund, but took the standard deduction the year I paid the tax?

The refund is not taxable. The rule looks at the year you paid the tax, not the year you receive the refund. Your deduction status in the current year does not matter.

Are city tax refunds treated the same way as state refunds?

Yes. City income tax refunds follow the same tax benefit rule. If you itemized and deducted city tax on your federal return, the refund is taxable. If you took the standard deduction, it is not.

Can I deduct a state refund from my federal taxes?

No. A state refund is income, not a deduction. You add it to your income, not subtract it. The only exception is if you paid state tax in a later year and want to deduct that—but the refund itself cannot be deducted.

What if the state refund is for a year I did not file a federal return?

You still owe federal tax on the refund if you would have itemized had you filed. However, if you had no federal tax filing requirement that year, you likely did not itemize, so the refund is not taxable. This is a situation where a tax professional can help clarify your specific circumstances.