A state refund is taxable income in the year you receive it if you deducted state taxes on your federal return the previous year
The IRS taxes you on state refunds because of how the tax deduction works. When you filed your federal return last year, you either took the standard deduction or itemized deductions. If you itemized and deducted state income tax (or state sales tax), you reduced your federal taxable income. Now that the state is refunding part of what you paid, the IRS sees that as income you're getting back — money you shouldn't have deducted in the first place.
The key rule: you owe federal tax on a state refund only if you deducted state taxes on your previous year's federal return. If you took the standard deduction instead, the refund is not taxable to the IRS, and you don't report it.
This applies to refunds from state income tax, state disability insurance, state unemployment insurance, and some state tax credits. It does not apply to federal refunds or refunds of federal taxes you paid.
Key Takeaways
- A state refund is taxable federal income only if you deducted state taxes on your previous year's federal return.
- If you took the standard deduction last year, your state refund is not taxable and requires no action.
- The IRS will send you a Form 1099-G in January or February showing the refund amount, and you report it on your current year's federal return.
- You cannot deduct the same state taxes twice — once as a deduction and again as a refund — so the taxable refund corrects that overlap.
- State refunds are almost never taxable at the state level where you received them, only at the federal level.
How the IRS knows about your state refund
The state tax agency that issued your refund is required to report it to the IRS on a Form 1099-G. This form shows the refund amount and goes to both you and the IRS, usually in January or February of the year after you receive the refund.
You will receive a copy in the mail or through your state's online tax portal. The IRS receives a copy at the same time. If you don't report the refund on your federal return and the IRS has a 1099-G showing you received it, the IRS will flag the discrepancy during processing.
Some states issue 1099-Gs for refunds under a certain amount (often $10 or less), and some do not. Check your state's tax website or your online account to see whether a 1099-G was issued for your refund. If you received a refund but no 1099-G, you still may owe tax on it if you deducted state taxes — report it anyway on your federal return.
When a state refund is not taxable
A state refund is not taxable federal income if you took the standard deduction on your previous year's federal return. The standard deduction is a flat amount (it varies by filing status and age) that reduces your taxable income without itemizing individual deductions. Most taxpayers use the standard deduction.
If you used the standard deduction, you did not deduct state taxes, so there is no overlap to correct. The refund is yours to keep without reporting it as income. You do not need to do anything with the 1099-G if you received one — just keep it for your records.
A state refund is also not taxable if the state is refunding something other than income tax — for example, a property tax refund or a sales tax refund in a state that does not have income tax. However, if you deducted property tax or sales tax on your federal return, the refund of that amount would be taxable.
Reporting the refund on your federal return
If you deducted state income tax on your previous year's federal return, you report the refund on Form 1040, Schedule 1, line 1 (or the equivalent line for your filing software). The line is labeled "State and local income tax refunds." Enter the amount shown on your 1099-G.
You do not need to attach the 1099-G to your return, but keep it with your tax records. If you file electronically, your software will prompt you for this information and place it in the correct location automatically.
If you received a refund but did not receive a 1099-G, you still report it if you deducted state taxes. Use the amount you actually received. The IRS may follow up later if the state files a 1099-G after you file, but reporting it yourself prevents penalties and interest.
State-level tax on the refund
In almost all cases, a state refund is not taxable at the state level. The state that issued the refund does not tax you on getting your own money back. A few states have specific rules for certain types of refunds, but state income tax refunds are universally exempt from state taxation.
You report the refund only on your federal return. Do not include it on your state return unless your state's tax instructions specifically tell you to (this is extremely rare and would be noted in your state's tax guide).
What happens if you deducted state taxes but received no refund
If you deducted state taxes on your federal return but the state did not issue a refund — because you owed money, broke even, or the refund was applied to next year's estimated tax — there is nothing to report. The deduction stands as you took it.
The taxable refund rule only applies when you actually receive money back. If the state kept your refund or applied it forward, you do not owe federal tax on an amount you did not receive.
Refunds from state unemployment and disability insurance
Some states issue refunds of unemployment insurance or state disability insurance contributions. These are treated the same way as income tax refunds: they are taxable federal income if you deducted those payments on your previous year's federal return.
You will receive a 1099-G for these refunds as well. Report them on the same line as state income tax refunds (Schedule 1, line 1) unless your tax software separates them. The IRS considers all state tax refunds together for this purpose.
Frequently Asked Questions
Do I have to pay tax on a state refund if I took the standard deduction?
No. The refund is taxable only if you deducted state taxes on your previous year's federal return. If you took the standard deduction, you did not deduct state taxes, so the refund is not taxable income. You do not report it on your federal return.
What if I deducted state taxes but my state refund is smaller than the deduction I claimed?
You report the refund amount you actually received, not the deduction amount. If you deducted $5,000 in state taxes but received a $2,000 refund, you report $2,000 as taxable income. The difference between what you deducted and what you got back is the net benefit you keep.
Can I deduct state taxes on this year's return if I got a refund last year?
Yes. The refund you received last year is separate from the state taxes you pay this year. You can deduct this year's state taxes on this year's return (if you itemize). The refund corrects last year's deduction; it does not prevent you from deducting this year's taxes.
What if I did not receive a 1099-G but I know I got a state refund?
Report the refund amount you received on your federal return anyway, on Schedule 1, line 1. The state may file a 1099-G after you file, or the refund may have been below the reporting threshold. Reporting it yourself prevents discrepancies with the IRS later.
Is a state refund taxable in the state where I received it?
Almost never. States do not tax refunds of their own money. You report the refund only on your federal return. Check your state's tax instructions if you are unsure, but state-level taxation of state refunds is extremely rare.