State tax refunds are not taxable income on your federal return
You do not report a state tax refund as income on your federal tax return. The IRS treats state and local tax refunds differently from other income because you already paid tax on the money when you earned it. The refund is simply a return of overpayment, not new income.
The one exception is if you claimed the state tax as an itemized deduction on your previous year's federal return. In that case, you may owe federal tax on part or all of the refund — but only the amount that actually reduced your federal tax bill. This rule is called the "tax benefit rule," and it applies to any refund of a tax you deducted.
Most people who take the standard deduction never encounter this issue because they do not itemize state taxes in the first place. If you are unsure whether you itemized in the year you paid the state tax, check your prior-year federal return (Form 1040) to see if you filed Schedule A.
Key Takeaways
- State tax refunds are not reported as income on your federal return unless you itemized deductions in the year you paid the state tax.
- If you itemized and claimed a state tax deduction, you report the refund on Form 1040, line 1 (or Schedule 1, depending on the year), but only the portion that reduced your federal tax.
- The IRS sends you Form 1099-G if your state refund is $10 or more, which helps you track what to report.
- You can use the IRS Worksheet for Taxable Refunds of State and Local Taxes to calculate exactly how much of your refund is taxable.
- If you did not itemize in the prior year, your state refund has no federal tax consequence at all.
When the tax benefit rule applies to your refund
The tax benefit rule means 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. To know whether you did, look at your prior-year federal return and check whether you filed Schedule A (Itemized Deductions).
If you took the standard deduction instead, you claimed no state tax deduction, so the rule does not apply. Your state refund is yours to keep with no federal tax consequence. This is true even if your state refund is large.
If you did itemize, the next step is to figure out how much of your refund is actually taxable. This is not always the full amount. The IRS Worksheet for Taxable Refunds of State and Local Taxes walks you through the calculation. In general, you only report the refund as income up to the amount of the deduction that actually lowered your federal tax bill in the prior year.
How to report a taxable state refund on your federal return
If you determine that part of your state refund is taxable, you report it on your federal return in the year you receive the refund. The line number depends on the tax year: on 2023 returns, it goes on Form 1040, line 1 (or Schedule 1, line 1, if you use that form). Check the current-year Form 1040 instructions to confirm the exact line for the year you are filing.
You do not need to attach anything to your return to report the refund — just enter the taxable amount on the correct line. The IRS already has a record of the refund because your state reported it to them on Form 1099-G.
If you received Form 1099-G from your state, the refund amount is shown in Box 2 (state income tax refund). Use that figure as your starting point, then apply the tax benefit rule to determine how much is actually taxable on your federal return.
Form 1099-G and what it means for your taxes
Your state sends Form 1099-G to you and the IRS if your refund is $10 or more. This form reports the refund amount so the IRS knows you received it. However, receiving a 1099-G does not automatically mean the refund is taxable federally — it just means the IRS is aware of it.
The 1099-G shows the refund amount, but it does not show whether you itemized in the prior year or whether the tax benefit rule applies to you. That information is your responsibility. You use the information on the 1099-G to complete the IRS worksheet and decide what to report on your federal return.
If you did not receive a 1099-G but you know you got a state refund, you can still report it if it is taxable under the tax benefit rule. The absence of a 1099-G does not mean the refund is not taxable — it usually just means the amount was under $10 or your state did not issue one for another reason.
Using the IRS worksheet to calculate your taxable refund
The IRS provides a worksheet specifically for this calculation. It is in the Form 1040 instructions under "Taxable Refunds of State and Local Taxes." The worksheet compares your state tax deduction from the prior year to your standard deduction for that year, then determines what portion of the refund is taxable.
The basic logic is this: if your state tax deduction was less than your standard deduction, then the deduction did not reduce your federal tax at all, and none of the refund is taxable. If your state tax deduction was more than your standard deduction, then only the amount above the standard deduction reduced your federal tax, and only that portion of the refund is taxable.
You will need information from your prior-year return to complete the worksheet: your state tax deduction amount and your standard deduction for that year. If you do not have a copy of your prior return, you can order one from the IRS using Form 4506-C or view it through your IRS online account at IRS.gov.
What happens if you do not report a taxable refund
If you owe federal tax on a state refund and do not report it, the IRS will likely catch it because your state has already reported the refund on Form 1099-G. The IRS matches 1099 forms to tax returns, and if your return does not include the refund, the IRS may send you a notice asking for the tax owed plus interest and penalties.
The penalty for not reporting income is typically 20 percent of the underpaid tax, plus interest calculated from the original due date of the return. If the error was unintentional and you correct it promptly after receiving an IRS notice, you may be able to reduce or eliminate the penalty by requesting relief.
The safest approach is to complete the IRS worksheet in the year you receive the refund and report any taxable amount on your federal return. If you are unsure whether the refund is taxable, you can also contact the IRS at 1-800-829-1040 or consult a tax professional.
State refunds and your prior-year tax situation
The taxability of your state refund depends entirely on what happened in the prior year — specifically, whether you itemized deductions and claimed a state tax deduction. If you had a major life change between the two years (such as moving to a different state, retiring, or a large change in income), your deduction status may have changed, which affects whether the refund is taxable.
For example, if you itemized in 2022 and claimed a $5,000 state tax deduction, but you take the standard deduction in 2023, your 2022 refund may still be taxable in 2023 because you did get a federal benefit from the 2022 deduction. The year you receive the refund is what matters for reporting it, not the year you paid the tax.
If you are receiving refunds from multiple states or if your tax situation is complex, a tax professional can help you determine the correct amount to report. Many tax software programs also include the worksheet and will calculate this for you automatically if you enter the necessary information.
Frequently Asked Questions
Do I have to report my state refund if I did not get a 1099-G?
Not if it is under $10 — most states do not issue 1099-G for refunds below that threshold. If your refund was larger and you did not receive a 1099-G, you should still report it if it is taxable under the tax benefit rule. The absence of a form does not change whether you owe federal tax on it.
What if I took the standard deduction last year?
Then your state refund is not taxable federally, regardless of the amount. The tax benefit rule only applies if you itemized and claimed a state tax deduction. You can keep the entire refund without reporting it on your federal return.
Can I claim the state refund as a deduction on my current federal return?
No. A refund is not a deductible expense — it is a return of money you already paid. You can only deduct state taxes you actually paid during the year, not refunds you received.
What if my state refund is larger than my state tax deduction from last year?
You only report the taxable portion, which is limited to the amount of the deduction that reduced your federal tax. Use the IRS worksheet to calculate this. The excess refund above your prior-year deduction is not taxable federally.
Do I need to amend my return if I forgot to report a state refund?
Yes, if the refund was taxable. File Form 1040-X (Amended U.S. Individual Income Tax Return) for the year you received the refund. Include the taxable amount and pay any tax owed, plus interest. The IRS will calculate the interest, and you may be able to request penalty relief if the omission was unintentional.