Federal tax refunds are not taxable income, but state refunds and refunds from other sources sometimes are

A federal tax refund — money the IRS sends you because you overpaid federal taxes — is not taxable income. You do not report it on your next year's tax return. The IRS already withheld or you already paid that money as tax, so getting it back does not create new taxable income.

State tax refunds work differently depending on which state you live in. Some states tax their own refunds; others do not. Refunds from sources other than taxes — insurance claims, business refunds, merchandise returns — follow their own rules and are often taxable or partially taxable depending on what they are and why you received them.

The key distinction is between money that was already taxed (or withheld as tax) and money that is new income to you. If you get back money you already paid as tax, it is not income. If you get back money that represents a gain or that you never paid tax on, it may be.

Key Takeaways

  • Federal tax refunds are never taxable income and do not appear on your next tax return.
  • State tax refunds are taxable in some states and not in others; check your state's rules or look at the 1099-G form your state sends.
  • Refunds from insurance claims, business transactions, and merchandise returns may be taxable depending on whether they represent a gain or recovery of a loss you deducted.
  • The IRS Form 1099-G reports state and local tax refunds; if you receive one, you may owe tax on that amount depending on your state.

Why federal refunds are never taxable

A federal tax refund is a return of money you already paid to the government as tax. When you overpay — through withholding from paychecks, quarterly estimated tax payments, or credits you claim — the IRS holds that money until you file your return. When you file, the IRS calculates what you actually owe, and if you paid more than that, they send the difference back to you.

That returned money is not new income. You earned the income in the year you worked. You already reported it on your tax return. The refund is simply a correction of how much tax you owed on income you already declared. The IRS does not send you a Form 1099 for a federal refund, and you do not report it anywhere on your next return.

This is true whether your refund comes from overpaid income tax, overpaid self-employment tax, or a refundable tax credit like the Earned Income Tax Credit. The source does not matter — if it is a federal refund, it is not taxable income.

State tax refunds: taxable in some states, not in others

Whether a state tax refund is taxable depends on your state's tax law. Some states tax their own refunds as income; others do not. A few states have no income tax at all, so there is no refund to tax.

The easiest way to know is to look at the Form 1099-G your state sends you if your refund was large enough. This form reports state and local tax refunds. If your state taxes its own refunds, the amount will appear in Box 2 of the 1099-G, and you will report it as income on your federal return. If your state does not tax refunds, you will not receive a 1099-G, or it will show zero in Box 2.

States that currently do not tax their own refunds include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — all states with no income tax. States that do tax refunds include California, New York, Illinois, and most others. If you are unsure, contact your state tax authority or check your state's tax form instructions for the year you received the refund.

Insurance refunds and claim settlements

Insurance refunds are generally not taxable if they return money you paid in premiums. If your homeowner's or auto insurance company refunds part of your premium because you cancelled early or because they overcharged you, that refund is not income — you are getting back money you already spent.

Insurance settlements for property damage or loss are also usually not taxable, because they are meant to restore you to the position you were in before the loss, not to give you a gain. If your car is damaged and the insurance company pays you to repair it, that payment is not taxable income.

The exception is if you deducted the loss on a previous tax return. If you claimed a casualty loss deduction and then later recovered money from insurance, you may owe tax on part or all of that recovery. You would report this on Form 4684 (Casualties and Thefts) and potentially on Schedule A or Schedule D depending on the type of loss and recovery.

Business refunds and merchandise returns

A refund you receive for merchandise you returned to a store is not taxable income. You are getting back money you spent, so there is no gain. The same is true for refunds on services you paid for but did not use.

Business refunds work the same way if you are the one receiving the refund. If a vendor refunds money you paid for supplies or services, it is not income — it is a reduction of your business expense. If you are self-employed and you deducted that expense on a previous return, the refund reduces your deduction for that year or the year you receive the refund, depending on your accounting method.

The only time a business refund becomes taxable is if you received a tax benefit from the original expense. If you deducted a $500 business expense in Year 1 and received a $500 refund in Year 2, you may owe tax on that refund in Year 2 because you got a tax deduction you would not have received if you had known about the refund.

Stimulus payments and government benefits

Federal stimulus payments — such as the Economic Impact Payments sent during the COVID-19 pandemic — are not taxable income. You do not report them on your tax return, and you do not owe tax on them.

If you received a stimulus payment in error or received more than you were may have access to to, the IRS may ask you to return it or may reduce your refund in a future year. But the payment itself, when you receive it, is not taxable.

Other government benefits like unemployment insurance, Social Security, and TANF (Temporary Assistance for Needy Families) have their own tax rules. Some are taxable, some are not, and some are partially taxable depending on your total income. These are not refunds, so they fall outside this article, but if you received government payments during the year, check the form the agency sends you to see whether it is taxable.

How to report state refunds on your federal return

If you received a state tax refund that is taxable in your state, you will report it on your federal return. The IRS Form 1099-G will show the amount in Box 2. You report this on Schedule 1 (Form 1040), line 1, as "State and local income tax refund."

If you use tax software, it will usually prompt you to enter the 1099-G information, and the software will place it in the correct location. If you file by hand, make sure you have the 1099-G in front of you so you enter the right amount.

Keep in mind that you only report the refund if your state taxes refunds. If you live in a state that does not tax refunds, you do not report it, even if you received one. The 1099-G will either not arrive or will show zero in Box 2.

What to do if you did not receive a 1099-G but think you should have

If your state taxes refunds and you received a refund but did not get a 1099-G, contact your state tax authority. The form is usually mailed by January 31 of the year after you received the refund. If it is late February and you have not received it, call your state's tax department or check their website to see if you can download a copy.

Do not guess at the amount. Use the actual refund amount from your state tax return or from the check or direct deposit you received. If you cannot find the exact amount, your state tax authority can tell you.

If you filed your federal return before receiving the 1099-G and did not report the state refund, you can file an amended return (Form 1040-X) to add it. You have three years from the original due date of your return to amend it.

Frequently Asked Questions

Do I have to report a federal tax refund on my next year's tax return?

No. Federal tax refunds are never taxable income and do not appear anywhere on your next return. You do not report them to the IRS.

What if I received a refund from my state but I am not sure if it is taxable?

Check your state's tax website or call the state tax authority. You can also look at the Form 1099-G your state sends — if Box 2 shows an amount, your state taxes refunds. If Box 2 is blank or you do not receive a 1099-G, your state does not tax refunds.

I deducted state and local taxes on my federal return last year. Do I owe tax on my state refund this year?

Possibly. If you deducted state income tax on Schedule A and then received a state refund, you may owe tax on part of that refund. This is called the "tax benefit rule." Your state's 1099-G will report the refund, and you report it on your federal return. The IRS will calculate whether you owe tax based on whether you actually received a tax benefit from the deduction.

Is an insurance refund taxable?

No, unless you deducted the loss on a previous tax return. A refund of insurance premiums or a settlement for property damage is not taxable because it returns money you already spent or restores you to your previous position, not a gain.

What about a refund I got from returning something to a store?

Store refunds are not taxable income. You are getting back money you spent, so there is no gain. The same is true for refunds on services or merchandise.