State tax refunds are not taxable income on your federal return in most cases

A state tax refund is money the state returned to you because you overpaid your state income tax during the year. The IRS does not count this refund as income you earned, so you do not report it on your federal tax return. The refund is simply a return of your own money that you had already paid to the state.

The one exception is narrow: if you claimed the state and local tax deduction (SALT) on your federal return in the year you overpaid, you may owe federal tax on the refund you receive the following year. This happens because you got a federal tax benefit from deducting state taxes you paid, and then the state gave some of that money back. The IRS wants to tax the portion of the refund that reduced your federal taxes.

Most people do not hit this exception. You only face it if you itemized deductions on your federal return (rather than taking the standard deduction) and included state income tax in that itemization.

Key Takeaways

  • State tax refunds are not reported as income on your federal return unless you claimed the state tax deduction in the year you overpaid.
  • If you did claim the state tax deduction and later received a refund, you report the refund as income on Form 1040, line 1, in the year you receive it.
  • The amount you report is limited to the amount of the state tax deduction you claimed — you cannot report more than you deducted.
  • Taking the standard deduction instead of itemizing means you will never owe federal tax on a state refund.
  • The IRS sends Form 1099-G if your state refund is $10 or more, which will show up in your tax software and alert you to report it.

When the SALT deduction creates a tax on your refund

The state and local tax (SALT) deduction lets you reduce your federal taxable income by the amount you paid in state income tax during the year. If you used this deduction on your federal return, you got a federal tax benefit from those state tax payments. When the state later refunds part of what you paid, the IRS treats that refund as income in the year you receive it.

This is called the "tax benefit rule." The logic is: you deducted the payment, so you should report the refund as income to offset that deduction. You are not paying tax on the full refund — only on the portion that actually reduced your federal taxes.

Example: You paid $8,000 in state income tax in 2023 and claimed it as part of your SALT deduction on your 2023 federal return. In 2024, the state refunds you $1,200 because you overpaid. You report that $1,200 as income on your 2024 federal return. You do not report it again in 2025 or any later year.

How to report the refund if you claimed SALT

If you received a state tax refund and you claimed the state tax deduction in the prior year, report the refund on Form 1040, line 1 (other income), in the tax year you receive the refund. This is where all state and local tax refunds go when they are taxable.

Your tax software will usually prompt you for this amount. If you received Form 1099-G from your state (which is issued when the refund is $10 or more), enter the amount shown in box 2 of that form. If you did not receive a 1099-G, use the amount the state told you it was refunding.

You only report the refund in the year you actually receive the money, not in the year you overpaid. If you received the refund by direct deposit or check, that is the year you report it. If the state applied it to next year's estimated tax, you report it in the year it was applied.

The standard deduction means no tax on your refund

If you took the standard deduction on your federal return instead of itemizing, you did not claim any state tax deduction. This means you get no federal tax benefit from state taxes you paid, so you owe no federal tax on a state refund you later receive. The refund is simply yours to keep without any federal tax consequence.

Most taxpayers take the standard deduction. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing jointly. You would only itemize if your total itemized deductions (SALT, mortgage interest, charitable donations, and other allowed items) exceed the standard deduction for your filing status.

If you are unsure whether you itemized in the year you overpaid, check your prior year tax return. Look at Form 1040, line 12. If it shows the standard deduction amount, you did not itemize and you owe no tax on the refund.

What Form 1099-G means and when you receive it

Form 1099-G is a refund statement your state sends when it refunds you $10 or more. Box 2 of the form shows the state income tax refund amount. You will receive this form by mail or through your state's online portal, usually by late January or early February of the year after you receive the refund.

The IRS also receives a copy of Form 1099-G. Your tax software will often import this information automatically, or it will alert you that a 1099-G has been filed in your name. This is a signal that you may need to report the refund as income — but only if you claimed SALT in the prior year.

If you did not receive a 1099-G but you know the state refunded you money, you still need to report it if you claimed SALT. Contact your state tax agency to ask for the refund amount, or check your bank or payment records to confirm what you received.

State refunds that are not taxable at all

Some state refunds are never taxable on your federal return, even if you claimed SALT. These include refunds of taxes other than income tax — such as sales tax refunds, property tax refunds, or vehicle tax refunds. Only state income tax refunds can trigger the tax benefit rule.

Additionally, if you received a state refund in a year when you did not claim any state tax deduction (because you took the standard deduction or because your state income tax was zero), that refund is not taxable. The tax benefit rule only applies when you actually got a federal tax benefit from the deduction.

Some states also offer tax credits or rebates that are not refunds of taxes you paid. These are generally not taxable on your federal return. If you are unsure whether your state payment was income tax or something else, the Form 1099-G you receive will clarify — it only reports income tax refunds.

Frequently Asked Questions

Do I report the state refund on my 2024 return if I receive it in January 2025?

Yes, you report it on your 2024 tax return (filed in early 2025) because that is the tax year in which you received the refund. The year you overpaid does not matter — only the year you actually got the money back.

What if the state applied my refund to next year's taxes instead of sending me a check?

You still report it as income in the year the state applied it, even though you did not receive cash. The IRS considers the refund received when the state credited it to your account, not when you physically received money.

Can I claim the state tax deduction and also report the refund as income without paying tax twice?

Yes, that is exactly how the tax benefit rule works. You deducted the payment in year one, then report the refund as income in year two. The two offset each other over time, so you are not double-taxed.

If I did not itemize last year, do I need to amend my return when I get a state refund?

No. If you took the standard deduction, the refund is not taxable and you do not report it. You do not need to amend anything. Simply keep the refund and move on.

What if my state refund is less than $10 — do I still report it?

You will not receive a Form 1099-G for refunds under $10, but you still report it as income if you claimed SALT in the prior year. Use the actual amount you received, even if it is small.