Why is my state income tax refund not taxable?

[Anonymous]

I itemized last year and deducting my state income taxes did reduce my federal tax.  My state and local taxes were less than the $10,000 limit.  I did not use the option to deduct general sales tax.  (The sales tax would have been much smaller.)  I did not meet any of the exemptions for not using the State and Local Income Tax Refund Worksheet, which when I completed manually, said the refund is taxable.  I used another reputable service which said they were taxable.  Yet, Turbotax tells me, after twice going through the process, that my refund is not taxable.  That's good for me, but shakes my confidence in Turbotax.  Are there any other reasons why a state income tax refund would not be taxable?

[ReginaM]

Your state or local tax refund received in 2019 could count as income if you itemized your deductions in 2018. If you did this, your 2018 tax return would have a Schedule A. If your return doesn't have a Schedule A, then your state or local tax refund won't count as income.

I was able to re-visit this section and add a 2018 State Refund to my income, but it took a bit of work as there was a big 2018 questionnaire TurboTax went through since I didn't prepare 2018 in TurboTax.  I just stepped through this questionnaire, and at the bottom of one of the screens it had a box that stated Make my whole State Refund Taxable.  

You may want to re-visit this section by following these steps, 

1. While you are in your Tax Home,
2. Select Search in the top right side of your screen,
3. Enter State Refund Taxable,
4. Select Go to State and Local Tax Refunds,
5. Select Yes,
6. Select State or Local Tax Refunds,
7. Select Continue,
8. Select Edit next to your refund,
9. Walk through all the questions, selecting Continue or Done,
10. Until you see the screen that says Let's see if your state refund is taxable,
11. Make sure all your answers are correct here.

Hopefully this helps!

[Anonymous]

Thank you for the reply.  I tried what you suggested.  Got through steps 1, 2, and 3, but the selection "Go to State and Local Tax Refunds" did not show-up.  So I was stuck there.

I, too, did not use Turbotax last year, but I did file a Schedule A.  I have twice previously worked through Turbotax's questions, and I don't expect a different answer.  I did see the button for the option to "Make My Whole Refund Taxable," but why would anyone choose that?

[LinaJ2020]

Let's look at your 2018 Schedule A, line 5a.  If you have the state and local income tax amount listed there, that means you took the state tax deduction.  Besides, if you also itemize on Schedule A, your 2018 state tax refund will be taxable to you in 2019.  You would need to report it on your 2019 tax return.  However, if you chose the state tax deduction but did not itemize, you would not report it.   

For more information, click here: State tax refund

@kgbachbob

[Anonymous]

1.  I itemized last year.  Line 5a of 2018 Schedule A does have an amount listed. 

2.  Deducting my state income taxes did reduce my federal tax.   

3.  My state and local taxes were less than the $10,000 limit. 

4.  I did not use the option to deduct general sales tax.  (The sales tax would have been much smaller.) 

5.  I did not meet any of the exemptions (listed in the instructions for Schedule 1 line 1) for not using the State and Local Income Tax Refund Worksheet, which when I completed manually, said the refund is taxable. 

Even after twice going through the questions for determining taxability, Turbotax still says my refund is not taxable.  I tried another tax on-line software product that said the refund was taxable.  Why does Turbotax say it's not taxable?  I could select the button that tells Turbotax to "Make my whole refund taxable" but why would anyone want to to that?     

[DianeC958]

TurboTax takes the information from your prior year to see the amount of benefit you received from your deduction of the State Income Tax you paid.

If you did not receive any benefit from the deduction the refund is not taxable.

There is a worksheet that you can look at with all of the calculations to show why the program is not taxing you on this amount.  The worksheet is called State and Local Income Tax Refund Worksheet.

[Anonymous]

I do not meet any of the reasons my state income tax would not be taxable.

1.  I itemized last year.  Line 5a of 2018 Schedule A does have an amount listed.  (I did not use Turbotax last year.) 

2.  Deducting my state income taxes did reduce my federal tax.   

3.  My state and local taxes were less than the $10,000 limit. 

4.  I did not use the option to deduct general sales tax.  (The sales tax would have been much smaller.) 

I called Turbotax live CPA assistant who was also perplexed as to why the refund was not taxable, but she could only say it was because the State and Local Income Tax Refund Worksheet said it was.  She was not allowed to show me the worksheet.  I did not meet any of the exemptions (listed in the instructions for Schedule 1 line 1) for not using the State and Local Income Tax Refund Worksheet, which when I completed manually, said the refund is taxable. 

Even after twice going through the questions for determining taxability, and checking my answers a third time, Turbotax still says my refund is not taxable.  I tried another tax on-line software product that said the refund was taxable. 

Why does Turbotax say it's not taxable? 

I did apply that refund to my estimated 2019 state income tax.  Does that make it non-taxable?

I could select the button that tells Turbotax to "Make my whole refund taxable" but why is that button there?Why would anyone want to to that?

Thanks to anyone who can help.

[DMarkM1]

The recovery of state income tax refunds is based on what the tax difference would have been had you not deducted the state income taxes.  Even though you didn't select the sales tax option those taxes are used in the calculation.  At the end of the day, the worksheet determines if your tax would have changed and if not then the refund is not taxable.    

edited 3/15/2020

[Anonymous]

Thank you DMarkM1 for responding.  Turbotax won't show me their version of the State and Local Tax Refund Worksheet.  So, I manually completed the IRS's worksheet.  Where on the IRS's worksheet does the general sales tax option become part of the calculation, (even though  it was not taken?)

[bananasplitz]

Considering the matter of whether or not I benefited from deducting the refunded amount of my state income tax, and looking at the worksheet, it still took a while to realize why my state income tax refund is not taxable this year. It is because the new increased federal standard deduction was greater than my itemized deductions, so I did not actually receive a federal tax benefit from ANY of my itemized deductions, even though looking at Schedule A makes it appear that I benefited from deducting that amount.  (I itemized because of the benefit to my state income tax, which outweighed the benefit of taking the federal standard deduction.)

[KrisD15]

If you take the Standard Deduction, the state refund is not taxable. 

If you itemized, but the amount was less than or equal to the Standard Deduction, the refund is not taxable. 

Depending on the state you file in, you might be able to take the Standard Deduction on your Federal return and then adjust for the itemized deductions you want to claim on your state return (for California for example), but that does depend on the state. 

[jdossett19]

Going by the instructions provided by the IRS, as well as by TurboTax, I also DON'T qualify for a pass on my state income tax refund.  In 2018, I DID ITEMIZE (Schedule A), and, I DID NOT use the General Sales Tax deduction.  However, you may recall that 2018 was the first year of the itemized deduction $10K CAP.  In 2018, I paid $14K in State and Local taxes, and $5K in State and Local Real Estate taxes ($19K total).  My State income tax refund was $2,700.  I believe because I lost $9K to the cap ($19K - $10K), that the refund amount ($2,700) wouldn't have had a bearing on my 2018 tax liability, and that's why it is now NOT TAXABLE in 2019.  So, as long as the cap remains, we will likely need to remember to manually(??) monitor this issue, unless TurboTax can do a better job of showing us WHY our state income tax refunds MAY or MAY NOT be taxable.   

[hustonlh]

Some where there subtraction of deductible purchase and not accounted credit and resident of Kentucky for the total 12 month period of year 2021. Can you say how estimated wages calculated or is credit of residency donation for deposal remizing and plus factor reserve. How also that estimated kentucky value and gross to my wages of 2021 w-2 form adjustment to 0.

[MichelleLO]

You are commenting on an older thread with outdated information. Do you have a specific question we can assist you with?

Also, you may want to consider starting a separate post for your question so that you get the most recent and accurate advice from the Community.

@hustonlh

[PGA1]

I know this is an old post, but I just found it by Googling the same question, so I figured I would chime in with the answer I found in case anyone else comes across it. It seems your state tax refund may be excluded from income even if you itemized on the prior year's return due to the $10,000 SALT deduction cap. The IRS explains it here: https://www.irs.gov/newsroom/with-new-salt-limit-irs-explains-tax-treatment-of-state-and-local-tax-r...