State tax refunds are taxable on your federal return only if you took the deduction on a prior year's federal return

A state income tax refund is federally taxable income in the year you receive it, but only if you deducted state income taxes on your federal return in the year the refund covers. If you took the standard deduction instead of itemizing, your state refund is not taxable federally. This rule exists because the IRS does not let you deduct a state tax expense and then exclude the refund from income — that would let you claim a deduction for money you got back.

The key is matching: the refund is taxable only because you previously deducted the state tax that generated it. No prior deduction means no federal tax on the refund.

Key Takeaways

  • State tax refunds are federally taxable only if you itemized deductions and claimed state income tax on your federal return in the year the refund covers.
  • If you took the standard deduction in the year you paid the state tax, your state refund is not taxable federally, even if you itemize in the year you receive it.
  • You report the refund on Form 1040 as "other income" in the tax year you receive the money, not the year the tax was paid.
  • The IRS sends you a Form 1099-G if your state refund exceeds $10, though some states do not issue this form for tax refunds.

How the deduction-and-refund rule works

The IRS applies what is called the "tax benefit rule." When you deduct state income taxes on your federal return, you reduce your federal taxable income. If you later get money back from the state, that refund is income to you in the year you receive it — otherwise you would have gotten a federal tax benefit (the deduction) without paying tax on the money that came back to you.

The rule only applies to the amount you actually deducted. If you itemized and deducted $8,000 in state income taxes, and later received a $2,000 state refund, that $2,000 is taxable federally. The remaining $6,000 in deductions you took stays as it was.

If you took the standard deduction in the year you paid the state tax, you received no federal benefit from paying that tax, so the refund is not taxable federally. This is true even if you itemize in the year you receive the refund.

Which year you report the refund

Report the state tax refund on your federal return for the tax year in which you receive the money, not the year you paid the state tax or the year the refund was issued. If your state sends you a refund check in March 2024, you report it on your 2024 federal return, even though the refund covers 2023 taxes.

The refund goes on Form 1040 as "other income" on line 8z (or the current equivalent line for miscellaneous income). You do not need to itemize in the year you receive the refund for it to be taxable — the taxability was determined by whether you itemized in the prior year.

When the IRS sends you Form 1099-G

If your state refund is $10 or more, your state tax agency typically issues a Form 1099-G (Certain Government Payments) and sends copies to you and the IRS. This form reports the refund amount in Box 2 (state income tax refund).

Not all states issue Form 1099-G for tax refunds — some do not report them at all. If you receive a 1099-G, use the amount shown to report the refund on your federal return. If your state does not send a 1099-G, you still report the refund if it is taxable under the rule above; the absence of a form does not make it non-taxable.

The IRS receives a copy of the 1099-G, so if you do not report the refund and should have, the IRS may send you a notice. If the refund is not taxable (because you took the standard deduction), keep documentation showing that fact in case you need to explain the discrepancy.

State refunds that are never federally taxable

Some state refunds fall outside the tax benefit rule entirely. Refunds of state sales tax, property tax, or other non-income taxes are not federally taxable, because you cannot deduct those taxes on your federal return (with limited exceptions for property tax under the $10,000 cap on state and local taxes, or SALT).

Refunds from state earned income tax credits (such as state versions of the EITC) are also not federally taxable, because tax credits are not deductions. Similarly, refunds from state child tax credits or dependent care credits are not federally taxable.

What to do if you did not itemize

If you took the standard deduction in the year you paid the state income tax, your state refund is not federally taxable, and you do not need to report it on your federal return. This is true regardless of whether you receive a Form 1099-G.

If you receive a 1099-G and did not itemize, you may want to keep a record of your tax return from the prior year showing that you took the standard deduction. If the IRS questions the refund, you can show that you received no federal benefit from the state tax payment, so the refund is not taxable.

Refunds from amended state returns

If you file an amended state return and receive a refund as a result, the same rule applies: the refund is federally taxable only if you deducted state income taxes on your federal return in the year the amended return covers. The year you receive the amended refund is the year you report it federally.

If the amended return changes the amount of state tax you owed, and you previously deducted a different amount on your federal return, you may need to file an amended federal return as well. For example, if you deducted $10,000 in state taxes but an amended state return shows you owed only $8,000, the $2,000 refund is taxable, but you may also want to amend your federal return to correct the deduction.

Frequently Asked Questions

Is my state tax refund taxable if I took the standard deduction?

No. The refund is taxable federally only because you deducted the state tax on a prior federal return. If you took the standard deduction, you received no federal benefit from the state tax payment, so the refund is not taxable federally.

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

You still do not owe federal tax on the refund. The 1099-G is issued based on the state refund amount, not on your federal tax situation. Keep your prior year's federal return showing the standard deduction as proof if the IRS contacts you.

Do I report the refund in the year I receive it or the year I paid the tax?

Report it in the year you receive the money. If you get a state refund in 2024 for 2023 taxes, it goes on your 2024 federal return, not your 2023 return.

Are state tax credits and refunds from credits federally taxable?

No. Refunds from state earned income tax credits, child tax credits, or other tax credits are not federally taxable, because tax credits are not deductions and do not trigger the tax benefit rule.

What if I itemized in the year I receive the refund but took the standard deduction when I paid the tax?

The refund is still not federally taxable. Taxability depends on whether you itemized in the year you paid the tax, not the year you receive the refund.