<topic sku="core" tNum="289585" author="sallyh" xmlns="x-schema:hhTopicSchema.xml"><index><title>Learn about state and local tax refunds</title><category>tax</category><klink type="prcdr">Tell me about state and local tax refunds</klink></index>
<content>
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<p>If you receive a refund of state or local income tax, you may have to report it as taxable income. Your state or local income tax refund is taxable income if you took a deduction for the tax in a previous year and you received a tax benefit from the deduction.</p>
<ul>
<li><emph>Example: refund not taxable.</emph> If you receive a refund in 2001 from your 2000 state tax return, and you did not itemize deductions on your 2000 federal tax return, none of your refund is taxable.</li>
<li><emph>Example: refund taxable.</emph> Assume that for 2000 you had $12,000 in itemized deductions, including your deduction for state income taxes withheld from your pay. You received a $200 refund of state taxes in 2001. Since you received a tax benefit for $4,650 ($12,000 in itemized deductions minus the $7,350 standard deduction) for 2000, when the taxes were withheld, you must add the $200 refund back to your income for 2001.</li>
<li><emph>Example: refund partly taxable.</emph> Assume again that for 2000 your standard deduction was $7,350, and you had $7,450 in itemized deductions, including your deduction for state income taxes withheld from your pay. You received a $200 refund of state taxes in 2001. Since you only received a tax benefit for $100 ($7,450 in itemized deductions minus the $7,350 standard deduction) for 2000, when the taxes were withheld, you add $100 of the refund back to your income for 2001.</li>
</ul>
<p> For more information, see IRS instructions for Form 1040 on the <alink type="xtnl" href="http://www.irs.gov">IRS Web site</alink>.</p>
