State tax refunds do not count as income on your federal tax return
A state tax refund is money the state returns to you because you overpaid your state income tax during the year. It is not new income. The IRS does not count it as taxable income on your federal return, because you already paid tax on the money when you earned it. The refund is simply a correction—you get back what was yours to begin with.
The only exception is if you claimed the state and local tax deduction (SALT) on your federal return in the year you paid the state tax. In that case, you may owe federal tax on the refund amount, but only up to the deduction you claimed. This is called the tax benefit rule, and it applies to any refund of taxes you deducted federally.
Most people do not owe tax on state refunds because most people take the standard deduction instead of itemizing. If you itemized and deducted state taxes, you will need to report the refund—but only the portion that actually reduced your federal tax bill.
Key Takeaways
- State tax refunds are not income and do not count toward your federal taxable income in most cases.
- If you itemized deductions and claimed state taxes on your federal return, you may owe federal tax on part or all of the refund.
- The IRS sends you Form 1099-G if your refund is $10 or more, and you must report it if the tax benefit rule applies to you.
- The tax benefit rule only applies to the amount of the refund that actually reduced your federal tax in the prior year.
- Keeping records of what you deducted and what you received back makes reporting accurate and simple.
When the tax benefit rule requires you to report the refund
The tax benefit rule says you must report a refund as income if you deducted the tax you are now getting back. This rule exists because the IRS does not want you to get a tax break twice—once when you deducted the payment, and again by not reporting the refund.
The rule only applies if you itemized deductions on Schedule A in the year you paid the state tax. If you took the standard deduction that year, the rule does not apply, and you report nothing. The standard deduction is what most taxpayers use, so most people never have to report a state refund.
If you did itemize, you report the refund on Form 1040, line 1, as "other income." You do not need to file an amended return for prior years. You simply report it in the year you receive the refund, on the return you file for that year.
How to figure out if you owe tax on the refund
Start by checking your prior-year return. Look at Schedule A to see whether you itemized or took the standard deduction. If you took the standard deduction, stop—you owe nothing on the refund.
If you itemized, look at the line where you claimed state and local taxes (SALT). Write down that amount. Then look at your refund notice from the state. The amount you report as income is the smaller of these two numbers: the refund amount, or the SALT deduction you claimed.
For example: if you deducted $8,000 in state taxes on your federal return, and the state refunds you $2,500, you report $2,500 as income. If the state refunds you $10,000 but you only deducted $8,000, you report $8,000 as income. You never report more than you deducted.
Form 1099-G and what it means
The state sends you a Form 1099-G if your refund is $10 or more. This form shows the refund amount in Box 1. You will receive it by January 31 of the year after you get the refund. You do not send this form to the IRS with your return, but you must keep it for your records.
The 1099-G does not tell you whether you owe tax on the refund. It only reports that you received one. You have to decide whether the tax benefit rule applies by looking at your own prior-year return. Some states print a checkbox or note on the 1099-G to remind you of the rule, but the form itself is not a information.
If you received a 1099-G and you did not itemize in the prior year, you still do not report the refund. Keep the 1099-G with your tax records, but do not include it as income on your return.
Refunds from other state taxes and credits
The tax benefit rule applies only to refunds of taxes you paid and deducted. It does not apply to refunds of state income tax credits, state earned income tax credits, or other credits you received. Those are not taxable on your federal return.
It also does not apply to refunds of sales tax, property tax, or other taxes you may have deducted. The rule is specific to state income tax refunds, because those are the refunds most commonly tied to itemized deductions.
If you are unsure whether a particular refund is a tax refund or a credit refund, check the state's notice or the 1099-G. The form will say what type of refund it is. If it is labeled as a credit or rebate, the tax benefit rule does not apply.
What to do if you cannot find your prior-year return
If you do not have a copy of the return you filed in the year you paid the state tax, you can request a transcript from the IRS. Call 1-800-908-9946 or go to IRS.gov and search for "Get Transcript." You can order a free transcript online or by phone, and it will show whether you itemized and what you deducted.
The transcript will take 5 to 10 business days to arrive by mail, or you can view it immediately online. Once you have it, look at the line for state and local taxes to see what you deducted. Then compare that to your refund amount and report accordingly.
If you itemized but did not deduct state taxes (because you deducted sales tax instead, for example), the tax benefit rule does not apply to your state income tax refund, and you report nothing.
Frequently Asked Questions
Do I report a state tax refund if I took the standard deduction?
No. The tax benefit rule only applies if you itemized deductions. If you took the standard deduction in the year you paid the state tax, you do not report the refund as income on your federal return, even if you receive a 1099-G.
What if I itemized but did not deduct state taxes?
You do not report the refund. The tax benefit rule applies only to refunds of taxes you actually deducted on Schedule A. If you itemized but deducted sales tax instead of state income tax, or deducted nothing for state taxes, the rule does not apply.
Can I owe more tax than the refund amount?
No. You report the refund as income, which increases your taxable income and may increase your tax bill. But you never report more than the smaller of the refund amount or the deduction you claimed. Your tax bill on the refund depends on your tax bracket.
Do I need to amend my prior-year return if I owe tax on the refund?
No. You report the refund on the return you file for the year you receive it, not on an amended return for the prior year. The refund is income in the year you get it, not in the year you paid the tax.
What if the state refund is for a different year than the one I itemized?
The tax benefit rule applies to the year you paid the tax and deducted it, not the year you receive the refund. If you deducted state taxes in 2022 and received a refund in 2024 for overpayment in 2022, you report the refund on your 2024 return, but you compare it to the deduction you claimed in 2022.