State refunds are taxable income in the year you receive them, but only if you took the deduction that created the refund in the first place

A state income tax refund is taxable on your federal return in the year you get the money. The reason is straightforward: if you deducted state taxes on your federal return last year, that deduction reduced your federal taxable income. When the state refunds part of what you paid, that refund is income you didn't expect, and the IRS counts it.

The key word is "if." If you didn't deduct state taxes on your federal return — because you took the standard deduction instead, or because you live in a state with no income tax — then your state refund is not taxable federally. The IRS only taxes the refund because you got a federal benefit from paying the tax in the first place.

This rule applies to refunds from state income tax, state disability insurance, and state unemployment insurance. It does not explore to refunds of sales tax, property tax, or other taxes you may have paid to your state.

Key Takeaways

  • A state income tax refund is taxable federal income only if you deducted state income taxes on your federal return the year before.
  • If you took the standard deduction instead of itemizing, your state refund is not taxable federally.
  • You report the refund on Form 1040 as "other income" in the year you receive it, not the year you paid the tax.
  • State refunds from unemployment insurance and disability insurance follow the same rule as income tax refunds.
  • The amount of the refund that is taxable may be less than the full refund if part of your deduction came from sources other than state income tax.

How the IRS knows about your state refund

Your state sends a Form 1099-G to both you and the IRS when you receive a refund over a certain amount. The threshold varies by state, but many states report refunds of $10 or more. This form tells the IRS exactly how much you received and when.

You will receive your Form 1099-G by January 31 of the year after you get the refund. If you don't receive one, that does not mean the refund is not taxable — it means your state did not report it, but the IRS may still expect you to report it yourself. Check your state's tax agency website or call them to confirm whether your refund was reported.

When a state refund is not taxable

Your state refund is not taxable federally if you took the standard deduction on your federal return instead of itemizing deductions. The standard deduction is a flat amount the IRS lets you subtract from your income without listing individual expenses. Most people use it because it is simpler and often larger than the total of their itemized deductions.

If you took the standard deduction, you did not deduct state income taxes, so you got no federal benefit from paying them. Therefore, the refund is not income to the IRS — it is straightforward money the state overheld and is returning to you.

You are also not taxed on a state refund if you live in a state with no income tax. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have state income taxes, so residents cannot receive state income tax refunds.

Reporting the refund on your federal return

If your state refund is taxable, you report it on Form 1040, line 1, as part of your income. The line is labeled "Other income" or may be specifically labeled for state refunds depending on the year. You enter the amount from your Form 1099-G.

The refund goes on the return for the year you received the money, not the year you paid the tax. If you received a refund in January 2024 for taxes you paid in 2023, you report it on your 2024 return.

If you received a Form 1099-G but you did not deduct state taxes on your federal return, you should still report the refund as $0 or attach a note explaining that you took the standard deduction. This prevents the IRS from sending you a notice later.

The "tax benefit rule" and partial refunds

In some cases, only part of your state refund is taxable. This happens under what is called the tax benefit rule. The rule says you only pay federal tax on the portion of the refund that gave you a federal benefit.

For example, suppose you itemized deductions and deducted $8,000 in state income taxes. But your total itemized deductions were only $1,000 more than the standard deduction would have been. In that case, only $1,000 of your state tax deduction actually reduced your federal taxable income. If you later receive a $2,000 state refund, only $1,000 of it is taxable federally.

Calculating this is complex, and most people do not need to worry about it. The IRS publishes a worksheet in the instructions to Form 1040 if you think this applies to you. Many tax software programs also handle this calculation automatically.

State refunds from unemployment and disability insurance

Refunds from state unemployment insurance and state disability insurance (SDI) follow the same rule as income tax refunds. If you reported the unemployment or disability payments as income on your federal return, then a refund of those payments is taxable. If you did not report them as income, the refund is not taxable.

Most people who receive unemployment or disability payments must report them as income, so most refunds are taxable. You will receive a Form 1099-G for these refunds as well, and you report them on Form 1040.

What to do if you cannot find your Form 1099-G

If you received a state refund but did not get a Form 1099-G, contact your state's tax agency directly. You can usually find the refund amount and date on your state tax account online, or call the agency's taxpayer service line. Write down the exact amount and date you received the refund.

You are responsible for reporting the refund even if you do not receive the form. If the IRS later matches your return against the state's records and finds a refund you did not report, you may owe additional tax plus interest and penalties.

If your state refund was very small — under $1 — your state may not have issued a Form 1099-G. In that case, you can report the refund based on your own records, or you may be able to leave it off your return if it is truly minimal. When in doubt, report it.

Frequently Asked Questions

Do I have to pay federal tax on a state refund if I already paid state tax on it?

No. The state refund is not subject to state tax again. Federal tax is separate from state tax. You may owe federal tax on the refund, but that does not mean you owe state tax on it as well.

What if I received a state refund but I do not remember deducting state taxes?

Check your prior year federal return. Look for Schedule A (Itemized Deductions) and see if you deducted state income taxes. If you do not have a copy, you can order one from the IRS or read it from IRS.gov. If you took the standard deduction, the refund is not taxable.

Can I deduct the state refund on my current year return?

No. A refund is income, not a deduction. You report it as income on your current year return. You cannot subtract it again.

If my state refund was small, do I still have to report it?

Yes, if it is taxable. The IRS expects you to report all income, regardless of amount. However, if the refund was so small that it does not change your tax liability, it may not matter in practice. When in doubt, report it to avoid problems later.

What if I owe state taxes and the state is keeping my refund to pay what I owe?

If your state refund was applied to back taxes you owe, you still received the refund — the state just sent it to your tax debt instead of to you. You still report it as income on your federal return. The state will issue a Form 1099-G showing the amount, even though you did not receive cash.