Are State Tax Refunds Taxable?

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March 15, 2023

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For individuals who itemize their deductions, it’s one of many stranger elements of the tax code. First, you get to take a deduction of your state and native taxes, then rapidly the following 12 months you get a Type 1099-G out of your state and also you’re paying taxes in your state and native tax refunds. So, why is that this occurring? What offers?

Earlier than we go into that, know that there are occasions when your state and native tax refund just isn’t taxable – we’ll dive into this situation first.

A common rule of thumb: In the event you didn’t deduct state and native revenue taxes final 12 months, you don’t have to pay taxes in your state and native tax refund this 12 months. For example, in case you didn’t itemize your deductions final 12 months and as a substitute you took the usual deduction, then your state tax refund from the earlier 12 months is tax-free this 12 months.

Gross sales Tax Deducted, However Not State Revenue Tax?

There’s an essential word to contemplate with reference to gross sales tax versus state and native revenue tax. On final 12 months’s return, in case you itemized your deductions and had been capable of deduct your gross sales tax and never your state and native revenue taxes, then your earlier 12 months’s state refund just isn’t taxable while you file this 12 months.

In the event you deducted your state and native revenue taxes final 12 months and in addition acquired a state refund final 12 months, then your state tax refund that you simply acquired from the earlier 12 months could also be taxable.

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