State income tax refunds are taxable only if you claimed the state tax deduction on your federal return the year you paid that state tax

The rule is straightforward: if you deducted your state income taxes on your federal return in the year you paid them, then a refund of those taxes counts as income when you receive it. You report it on your federal return for the year you get the refund. If you did not deduct state taxes that year — because you took the standard deduction instead — then the refund is not taxable to you.

This is called the "tax benefit rule." It exists because the tax code does not let you deduct money twice. If you deducted $5,000 in state taxes and got $1,200 of it back, you received a tax benefit from money you did not actually pay. The refund corrects that.

The IRS sends you a form called Form 1099-G when you receive a state income tax refund. This form shows the amount of the refund. You use it to report the refund on your federal return, but only if the tax benefit rule applies to you.

Key Takeaways

  • You owe federal tax on a state income tax refund only if you deducted state income taxes on your federal return in the year you paid those state taxes.
  • The IRS uses Form 1099-G to report your refund, and you report the taxable portion on your federal return for the year you receive the refund.
  • If you took the standard deduction instead of itemizing, your state refund is not taxable because you received no tax benefit from paying the state tax.
  • Some states do not tax income at all, so residents of those states never receive state income tax refunds.
  • You may be able to exclude part or all of a refund if your income was below a certain level in the year you paid the state tax.

How the tax benefit rule works in practice

The tax benefit rule only applies to the extent you actually received a tax benefit. Here is what that means: if you itemized deductions on your federal return and included state income taxes, you got a benefit — your federal taxable income went down. When you get a refund, you are getting back money that lowered your federal taxes, so the refund itself becomes taxable income.

If you took the standard deduction, you did not deduct state taxes at all. You received no federal tax benefit from paying them. Therefore, a refund of those taxes is not taxable income to you — you are straightforward getting your own money back.

The year matters. If you paid state taxes in 2023 and deducted them on your 2023 federal return, but then received a refund in 2024, you report the refund on your 2024 federal return. The refund is taxable in the year you receive it, not the year you paid the tax.

When you receive Form 1099-G and what to do with it

Your state will mail Form 1099-G to you and to the IRS if your refund exceeds a certain amount. That threshold varies by state — some states report all refunds, others only those above $10 or $25. You should receive the form by early February if the state issued a refund in the prior year.

When you file your federal return, you report the amount from Form 1099-G on Schedule 1 (Form 1040), line 1. But you only do this if the tax benefit rule applies — meaning you deducted state taxes the year you paid them. If you took the standard deduction, you do not report the refund at all, even if you receive Form 1099-G.

Keep Form 1099-G with your tax records. If the IRS questions your return, you will need to show that you either reported the refund correctly or that the tax benefit rule did not explore to you.

States with no income tax and how they affect refunds

Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). Residents of these states do not pay state income tax and therefore do not receive state income tax refunds. If you moved to one of these states during the year, you may have paid state tax to your former state and later received a refund, which would follow the normal tax benefit rule.

Some states have a state sales tax instead of or in addition to income tax. A refund of sales tax is not the same as a state income tax refund and follows different rules. This article covers only state income tax refunds.

The partial inclusion rule for lower-income taxpayers

If your income in the year you paid the state tax was below a certain threshold, you may be able to exclude part or all of your refund from federal taxable income. This is called the "limited tax benefit rule" or the "partial inclusion rule."

The threshold depends on your filing status and changes each year. For 2023, for example, the threshold was $21,570 for single filers and $43,492 for married couples filing jointly. If your adjusted gross income was below that threshold in the year you paid the state tax, you can exclude the refund (or part of it) from income on your current return.

You do not need to file a special form to claim this exclusion. You straightforward report a lower amount on Schedule 1, or report zero if the entire refund qualifies. Keep documentation showing your income in the year you paid the tax, in case the IRS asks.

What happens if you did not receive Form 1099-G but got a refund

If you received a state income tax refund but did not get Form 1099-G, the state may not have issued one because the refund was below the reporting threshold. You still need to report the refund on your federal return if the tax benefit rule applies — the absence of Form 1099-G does not change your tax obligation.

Check your state's tax website or contact the state revenue department to confirm the refund amount. You can also look at your state tax return from the prior year to see how much state tax you deducted on your federal return. If you deducted it, the refund is taxable.

Frequently Asked Questions

Do I have to report a state income tax refund if I took the standard deduction?

No. If you took the standard deduction on your federal return in the year you paid the state tax, you did not deduct state taxes, so you received no federal tax benefit. The refund is not taxable to you and you do not report it on your federal return.

What if I itemized deductions but my state taxes were not large enough to exceed the standard deduction?

If you itemized and included state taxes in your itemized deductions, then you deducted them and received a federal tax benefit. The refund is taxable, regardless of whether your total itemized deductions exceeded the standard deduction. What matters is whether you actually deducted the state taxes on your federal return.

Can I deduct state income tax on my federal return if I am going to get a refund?

Yes. You deduct state taxes based on what you paid in that tax year, not on what you ultimately keep after a refund. If you paid $6,000 in state taxes during 2023, you can deduct $6,000 on your 2023 federal return. If you get a $1,500 refund in 2024, you report that refund as income on your 2024 return.

What if I moved to a different state during the year?

You may have paid taxes to two states. Each state refund follows the tax benefit rule separately. If you deducted taxes to State A on your federal return, a refund from State A is taxable. If you did not deduct taxes to State B (perhaps because you took the standard deduction), a refund from State B is not taxable.

Does a state income tax refund affect my may be able to access for any federal programs?

Some federal programs count income in the year you receive it. A state income tax refund reported on your federal return counts as income for that year. If you are near an income threshold for a program like the Earned Income Tax Credit or a health insurance subsidy, a refund could affect your status. Check the program's rules or speak with a tax professional if you are concerned.