A state tax refund is taxable on your federal return only if you itemized deductions in the year you paid that state tax and the itemizing actually reduced your federal tax bill. If you took the standard deduction that year, the refund is not federal income. So the question of whether state refunds are taxable on your federal return comes down to one prior-year choice: Schedule A or the standard deduction.
If You Took the Standard Deduction, You’re Done
Roughly nine in ten filers claim the standard deduction. If that was you on the return for the year the state tax was paid, you never deducted state income tax in the first place, so getting some of it back creates no federal tax issue. The 1099-G your state sent can be set aside for federal purposes.1Internal Revenue Service. IRS Issues Guidance on State Tax Payments
The rest of this applies only to filers who itemized that prior year.
The Tax Benefit Rule Decides It
Federal law at 26 U.S.C. ยง 111 says that when you recover something you previously deducted, you include it in income only to the extent that deduction actually cut your tax.2Office of the Law Revision Counsel. 26 U.S. Code 111 – Recovery of Tax Benefit Items Applied to a state refund, the comparison is between your prior-year itemized deductions and the standard deduction you could have taken instead. Only the amount by which itemizing beat the standard deduction counts as a tax benefit, and only that spread can be taxed when the refund comes back.
Two numbers from the prior year drive this: your actual itemized deductions on Schedule A, and the standard deduction that would have been available to your filing status. Subtract one from the other to get your tax benefit amount.
Figuring the Taxable Amount
Once you have the tax benefit amount, compare it to the refund. The taxable portion is whichever is smaller. The IRS worksheet in the Schedule 1 (Form 1040) instructions walks through the mechanics, and Publication 525 covers the trickier cases.3Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income
Refund Smaller Than the Benefit
A single filer itemized $17,500 when the standard deduction was $16,100. The tax benefit amount is $1,400. If the state refund was $900, the whole $900 is taxable, because every dollar of it traces back to a deduction that lowered federal tax.
Refund Larger Than the Benefit
A married couple filing jointly itemized $33,000 when the standard deduction was $32,200. The tax benefit amount is $800. The state refunds them $3,500. Only $800 is taxable. The other $2,700 corresponds to deductions that did not actually push them below what the standard deduction would have given them, so no double benefit exists on that portion.3Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income
This is where filers most often overpay. The 1099-G shows the full $3,500, and it is tempting to report the whole number. Running the calculation can cut that significantly.
If You Hit the SALT Cap
The state and local tax deduction is capped. For 2018 through 2024 the cap was $10,000. For 2026 it rises to $40,400 for single and joint filers, with $20,200 for married filing separately, and it phases down for filers with modified adjusted gross income above $505,000, though never below $10,000.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
If your actual state and local taxes exceeded the cap that applied, the excess was never deducted. A refund of taxes you never deducted is not taxable. Only the portion of the refund attributable to taxes actually included on Schedule A can trigger income.5Internal Revenue Service. Revenue Ruling 2019-11
Example: a joint filer paid $48,000 in combined state income and property taxes but could only deduct $40,400 because of the cap. That leaves $7,600 undeducted. A later $5,000 state income tax refund fits entirely within the undeducted portion and is not taxable at all.
This mattered more under the old $10,000 cap, when filers in high-tax states hit the ceiling routinely. It still comes up at the higher cap, and anyone whose combined state and local taxes exceeded whatever limit applied that year should run the check.
If You Paid AMT That Year
Alternative minimum tax disallows the state and local tax deduction entirely when computing alternative minimum taxable income. If AMT applied in the year you deducted the state tax, your deduction may have delivered little or no actual benefit, which can reduce or wipe out the taxable portion of the refund.
The standard worksheet in the Schedule 1 instructions does not handle this. Publication 525 provides a separate Worksheet 2 for filers who were subject to AMT in the prior year.3Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income Skipping that step and reporting the full 1099-G number often means paying tax you don’t owe.
Interest Paid on a Late Refund
Some states pay interest when a refund is processed late. That interest is always taxable federal income, whether or not the underlying refund is taxable. The state reports it on Form 1099-INT, and you include it as interest income.6Internal Revenue Service. Topic No. 403, Interest Received The tax benefit rule doesn’t apply, because you never deducted the interest.
Local and Property Tax Refunds
Refunds of city or local income taxes work the same way. If you deducted those taxes on Schedule A, a later refund is potentially taxable under the identical tax benefit analysis, reported on a 1099-G.7Internal Revenue Service. Taxable Refunds, Credits or Offsets of State or Local Income Taxes Property tax refunds or rebates for a prior year follow the same logic: include them in income only to the extent the original deduction actually gave you a federal tax benefit.
How to Report It on Your Federal Return
Your state sends Form 1099-G by January 31 after the year it issued the refund. Box 2 shows the total state or local income tax refund, credit, or offset.8Internal Revenue Service. Instructions for Form 1099-G The IRS gets a copy automatically.
Box 2 is the gross refund, not the taxable amount. The state does not run the tax benefit calculation for you. Once you have your taxable figure, report it on Schedule 1 (Form 1040), Line 1, “Taxable refunds, credits, or offsets of state and local income taxes.”9Internal Revenue Service. Schedule 1 (Form 1040) 2025 That total flows into adjusted gross income on Form 1040.
The IRS matches 1099-Gs against returns, so reporting zero when Box 2 shows a refund can draw a notice. If the refund really is not taxable after you apply the tax benefit rule, zero is still correct. Keep the prior-year return and your worksheet with your records in case the IRS asks.
When the 1099-G Is Wrong
If Box 2 doesn’t match what you actually received, ask your state tax agency for a corrected form. If one doesn’t arrive before the filing deadline, file using the amount you know is right.10Internal Revenue Service. What to Do When a W-2 or Form 1099 Is Missing or Incorrect If a corrected form shows up later with a different number and you have already filed, you may need to amend using Form 1040-X.
The Sales Tax Election Wrinkle
If you could have deducted state general sales taxes instead of state income taxes on the prior-year Schedule A, the taxable refund is capped at the difference between the two options. Publication 525 gives an example: a filer could have deducted $10,000 in income taxes or $9,000 in sales taxes, chose income taxes, and later received a $2,500 refund. Because the sales tax alternative was $9,000, only $1,000 of the refund can be taxable, regardless of what the tax benefit math otherwise shows.3Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income Filers in states with both income and sales taxes should check whether this rule shrinks their taxable amount further.