Do I Have to Claim My State or Local Refund from Last Year?
When you receive a state or local tax refund from a prior year, you may need to report it on your current year's federal tax return, depending on how you claimed deductions in the year you originally paid the taxes.
When Is a Refund Taxable?
- If you itemized deductions in the year you paid state and local taxes (SALT) and claimed the deduction, then any refund you receive in the following year may be taxable.
- The refund is considered taxable income to the extent that it reduces your itemized deductions for the year you originally claimed them.
- If you took the standard deduction in the year you paid the taxes, your refund is generally not taxable.
How to Report the Refund
- Report the taxable portion of your state or local tax refund on Form 1040, Schedule 1, line 1 (Additional Income).
- Use the worksheet in Form 1040 or Publication 525 to calculate how much of your refund is taxable.
- Only the amount that corresponds to the deduction you claimed in the prior year is taxable.
Important Notes
- The IRS requires you to report the refund if it relates to a deduction you claimed in a prior year.
- Even if you received a refund, you may still owe federal tax if the refund reduces your itemized deductions below your standard deduction.
- Always check your state’s rules, as some states may have different reporting requirements.
Source:
Publication 525
Schedule 1 (Form 1040) Instructions
Disclaimer: Always verify details with your Federal or State Department of Revenue Forms and Instructions. The information provided here is based on general federal guidelines and may not apply to your specific state or local tax situation.