Are IRS, State, or Local Tax Refunds Taxable?
When you receive an IRS refund, you may wonder if it is taxable income. The simple rule of thumb is this:
See more details below - eFile your taxes on eFile.com and the eFile platform will prompt you to enter last year's refund if it is applicable due to a SALT deduction.
IRS Tax Refund
Generally, an IRS or federal tax refund from last year is not taxable on the subsequent tax year federal or state income tax return. However, if the IRS paid interest in association with a federal tax refund, this interest income is taxable on the IRS and often state tax return for the following year; the taxable interest is most likely reported on Form 1099-G or 1099-INT.
Details on taxable income
State Tax Refund
Unless you took the itemized deduction, then you don’t need to report the state tax refund as income when filing your federal tax return for the tax year when it increased your refund or lowered your taxes.
If all three of the following applied to you, your state refund counts as taxable income on your tax return:
- On your last tax return you itemized deductions, instead of taking the standard deduction
- You claimed state and local income taxes and not general sales taxes
- The deduction increased your federal return or lowered your tax bill
The same applies here as under State Tax Refund above
Not the entire tax refund might be taxable, as it depends on how much the deduction affected your refund or taxes due. Simply start a tax return on eFile.com and we will do the rest of you. Start and eFileIT!
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