State income tax refunds are taxable only if you deducted state taxes on your federal return the year you paid them
A state income tax refund becomes taxable federal income in the year you receive it — but only under one condition. You owe federal tax on the refund only if you itemized deductions on your federal return for the tax year in which you originally paid the state taxes that generated the refund.
If you took the standard deduction instead of itemizing, your state refund is not taxable. The IRS calls this the tax benefit rule: you pay federal tax on money you get back only if you got a federal tax benefit from paying it in the first place.
The refund itself arrives from your state tax authority — usually by check, direct deposit, or prepaid card — but the taxability question is a federal matter. You report it on your federal return for the year you receive the refund, not the year you paid the original state taxes.
Key Takeaways
- State income tax refunds are taxable federal income only if you itemized deductions on your federal return in the year you paid the state taxes.
- If you claimed the standard deduction, your state refund is not taxable at the federal level.
- You report the refund on your federal return for the year you receive it, using Form 1040 Schedule 1 or your tax software's refund income section.
- The IRS sends you a Form 1099-G if your refund is over $10, which you must match to your tax return.
- Some states also tax refunds of state income taxes, which is separate from the federal taxability question.
How the tax benefit rule determines what you owe
The tax benefit rule works like this: if you deducted state income taxes on Schedule A (itemized deductions) in 2023, and you received a refund of those taxes in 2024, you must report that refund as income on your 2024 federal return. The logic is that you reduced your federal taxable income when you deducted the state taxes, so when you get the money back, the federal government wants its share.
If you took the standard deduction in 2023 instead, you never got a federal tax benefit from paying those state taxes. Therefore, when you receive the refund in 2024, there is no federal tax owed on it. You keep the full amount without reporting it as income.
This matters most for people who itemize in some years and take the standard deduction in others. You need to know which method you used in the year you paid the state taxes, not the year you receive the refund.
Matching your refund to the Form 1099-G the IRS receives
When your state refund exceeds $10, your state tax authority sends both you and the IRS a Form 1099-G. This form reports the refund amount and the tax year to which it applies. The IRS matches the 1099-G it receives from your state to your federal tax return.
If you do not report the refund on your federal return and the IRS has a 1099-G showing the refund, the IRS will likely send you a notice asking why the income is missing. You then have to respond and either report the income or explain why it is not taxable (because you took the standard deduction that year).
Most tax software automatically prompts you to report 1099-G income. If you file by hand, you report the refund on Form 1040, Schedule 1, line 1 (or the current equivalent line for "other income"). Write "State tax refund" next to the amount.
What to do if you itemized in some years but not others
Many people switch between itemizing and taking the standard deduction depending on their circumstances. If you itemized in 2023 and took the standard deduction in 2024, a refund you receive in 2024 is still taxable — because you itemized in 2023, when you paid the taxes.
The year that matters is the year you paid the state income taxes and deducted them, not the year you receive the refund. Keep a record of which method you used each year so you can answer this question correctly when a refund arrives.
If you are unsure whether you itemized in the year you paid the state taxes, check your prior-year tax return. Look at Schedule A (if you filed one) or note whether you reported the standard deduction amount instead.
State-level taxation of state income tax refunds
Some states tax refunds of state income taxes as state income. This is separate from the federal question. For example, if you live in a state that taxes refunds and you receive a $500 state income tax refund, your state may treat that $500 as taxable state income for the current year.
Only a handful of states do this, and the rules vary. A few states tax refunds only if you itemized on your state return (mirroring the federal rule), while others tax all refunds. Check your state tax authority's website or call their refund line to learn whether your state taxes refunds.
If your state does tax refunds, you will usually see this addressed in your state's tax forms or instructions for the year you receive the refund. Some states issue a state-level 1099-G equivalent that flags the refund as taxable state income.
Refunds under $10 and the reporting threshold
The IRS does not require your state to send a Form 1099-G for refunds under $10. However, you are still required to report the refund as income on your federal return if you itemized in the year you paid the taxes — the $10 threshold is only about whether the state must issue the form, not about whether the income is taxable.
In practice, very small refunds often go unreported because there is no 1099-G to trigger an IRS match. But technically, the tax benefit rule still applies. If you want to be fully compliant, report any refund you receive if you itemized in the year you paid the state taxes.
How to report the refund on your tax return
If you file electronically using tax software, the software will ask whether you received a state tax refund and whether you itemized in the prior year. Answer those questions and the software will place the refund in the correct location on your return.
If you file by hand or with a tax professional, report the refund on Form 1040, Schedule 1, line 1 (or the current year's equivalent for other income). Write "State tax refund" and the amount. Attach the Form 1099-G you received from your state.
If you received a 1099-G but the refund is not taxable because you took the standard deduction, you still need to file the return showing the 1099-G amount but with an explanation. Many tax software packages have a field for this; if filing by hand, attach a note explaining that you took the standard deduction in the year the state taxes were paid.
What happens if you report the refund incorrectly
If you report a non-taxable refund as income, you will pay more federal tax than you owe. You can file an amended return (Form 1040-X) to correct this and request a refund of the overpayment. The IRS typically processes amended returns within 16 weeks.
If you do not report a taxable refund and the IRS has a 1099-G, the IRS will send you a notice of underreported income. You will owe the tax on the refund plus interest and possibly a penalty. Responding quickly with documentation of your itemization status can help resolve this without additional penalties.
If you are unsure whether your refund is taxable, file the return reporting the refund as income. You can always amend later if you discover you should not have reported it. It is safer to over-report initially than to under-report and face an IRS notice.
Frequently Asked Questions
Do I have to report a state tax refund if I did not receive a Form 1099-G?
If your refund was under $10, your state may not have issued a 1099-G, but you are still required to report it if you itemized in the year you paid the state taxes. The $10 threshold only determines whether the state must send the form to the IRS, not whether the refund is taxable.
What if I received a state refund but I am not sure if I itemized that year?
Check your prior-year federal tax return. Look for Schedule A; if you filed one, you itemized. If you only see the standard deduction amount reported, you did not itemize and the refund is not taxable. Your tax preparer or software can also pull up your prior return if you need help.
Can I deduct the state refund I received this year?
No. A refund is income, not a deductible expense. You report it as income on the year you receive it. You cannot deduct it in any year.
If my state taxes the refund, do I also owe federal tax on it?
Possibly. The federal taxability depends on whether you itemized in the year you paid the state taxes. The state taxability depends on your state's rules. Both can apply independently — you may owe federal tax, state tax, both, or neither depending on your circumstances and your state's law.
What if I received a refund for a year I did not file a federal return?
You still may owe federal tax on the refund if you itemized state taxes in that year. You should file a federal return for that year to report the refund. Contact the IRS or a tax professional if you are unsure whether you are required to file.