The good news is you received a state income tax return refund. The bad news is you may be liable to pay federal taxes for the state tax refund. The IRS informs U.S. taxpayers that a state income tax return may sometimes be considered taxable income. The taxability of a state income tax refund is dependent upon if you benefited from the state taxes on your federal tax return. Let me explain. Related Posts - Are your income items taxable? - Dividend Income: How is dividend income taxed? - Do you qualify for the Sec. 199A QBI deduction? State Tax Refunds The receipt of a state income tax refund is taxable if the state income taxes paid in the tax year resulted in a tax benefit. The receipt of a state income tax refund is not taxable if the state income taxes paid in the tax year resulted in no tax benefit. This rule exists to prevent a double benefit. The IRS does not want you to claim a deduction for state income taxes and then receive a tax-free refund in the subsequent year.
Tax topics made simple. Textbook Tax aims to educate readers about a broad range of tax-specific topics and issues. The goal being to explain tax in an easy to learn format for both educational and real-life application.