Are State Tax Refunds Taxable? What To Know Before You File in 2026

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A state tax refund may be taxable on your federal return — but only if you received a tax benefit from deducting those state taxes last year. 

The Tax Benefit Rule and SALT cap limit how much of your state income taxes you can deduct, depending on factors like your income, so they can affect whether your state tax refund is taxable. It’s important that you understand how these rules work so you don’t over- or under-report your state tax refund.

Why Some State Tax Refunds Are Taxable — and Others Aren’t 

Whether your state tax refund is taxable will depend on how you claimed deductions and how the refund has affected your tax bill.

How the IRS Decides Whether Your Refund Is Taxable

Your tax refund is only taxable if it reduced your federal tax bill last year. That depends on whether you itemized deductions or took the standard deduction when you filed your tax return. Because most people claim the standard deduction, they do not need to pay taxes on their state refunds.

For example, if you itemized your deductions and deducted payments for state tax last year, you could have reduced your federal tax income and even fallen into a lower federal tax bracket.

If you choose to write off your income tax, you may not need to report the entire state refund as income. You only have to report the amount you received that is more than the amount you deducted in the previous year. For example, if you deducted $1,500 in state taxes last year, but your state refund this year was $2,000, you only need to report a tax refund of $500 on your federal income tax return.

If you chose the standard deduction on your federal income tax return and received a state refund, the situation is simple and you won’t owe any federal income tax on your state tax refund. In this scenario, your tax refund isn’t increasing your wealth. It’s a refund of an overpayment, so the IRS doesn’t consider it taxable.

How To Tell if Your Refund Counts as Income

Fully understanding the Tax Benefit Rule can help you determine how and why your refund might count as income.

What the Tax Benefit Rule means

The IRS Tax Benefit Rule states that if you received a state tax refund and you deducted that refund from your income, you must usually include it in your taxable income. However, only the portion of your deduction that actually lowered your taxable income matters. Your refund is taxable only to the extent that it provided you with a benefit.  

How To Calculate: An Example

Say that you itemized your deductions in 2024. You paid $12,000 in state and local taxes. Because the State and Local Tax (SALT) deduction was capped at $10,000, according to Fidelity, you could only deduct $10,000 of your state and local taxes from your taxable income, meaning $2,000 of your state and local taxes weren’t deducted.

Say you received a $2,000 state refund from your 2024 taxes. Since your $2,000 of state and local income tax weren’t deducted from your income when you paid your taxes, some or all of your $2,000 refund may not be taxable; that portion of your income tax didn’t benefit you by reducing your taxable income, so the IRS doesn’t see it as taxable income.

Why Itemizing Doesn’t Always Mean Your Refund Is Taxable

Understanding how much of your state tax refund may be taxable gets confusing. Many filers assume that if you’ve itemized your deductions, then your refund will naturally be taxable, but that’s not always true.

The SALT cap changes the math, and it may mean that some of your refund is taxable, while some of it is not.

How the SALT Cap and Special Situations Can Change the Answer

The SALT cap affects how much of your state taxes you can deduct from your taxable income. It also affects how much of the state taxes you pay may benefit you and be taxable, and what portion of your state tax return may not be taxable.

What Is the $10,000 SALT Cap? 

According to the Tax Policy Center, the 2017 Tax Cuts and Jobs Act capped the SALT deduction at $10,000 a year while increasing the federal standard deduction. As a result, filers who pay high amounts of state taxes can only deduct $10,000 worth of their taxes — they don’t receive a full deduction.

Since only a portion of state taxes may be deducted in this scenario because of the SALT cap, state tax refunds may be partially or full non-taxable.

Common Situations That Confuse Taxpayers

Taxpayers often overlook some common exceptions:

• State sales tax is usually not deductible unless you deduct the sales tax instead of your state income taxes on your return.
• The Alternative Minimum Tax (AMT) sets a limit on tax benefits, like deductions, that can significantly reduce your regular tax. If you have a high income, the AMT might apply to your taxes, limiting your exemption amounts.
• In some cases, itemizing your state income taxes may not increase your itemized deductions above the standard deduction, and claiming the standard deduction may be more beneficial.  

How To Report a Taxable State Refund on Your Federal Return

If you’ve determined that you need to report your taxable state refund on your Federal return, you’ll need to find the correct form and location to do so.

Which Tax Forms to Use and Where to Report It

You’ll receive a copy of Form 1099-G, which you can use to report your taxable state refund. You’ll find your state and local income tax amount listed in Box 2 of the form.

Once you’ve received Form 1099-G, use it to complete your current tax year’s Form 1040, Line 1, Other Income. The IRS provides detailed instructions on how to complete the worksheet.

If you don’t receive a 1099-G by February, check with your state’s tax office. Check your email, too. You may have elected to receive the form electronically.

Before You File: What To Double-Check

Before you file your taxes, double-check to make sure they’re accurate:

• Refer to last year’s return and confirm whether you itemized your deductions or claimed the standard deduction.
• If you itemized your deductions, check to see whether the SALT cap applied and limited the portion of your state income taxes that you were able to deduct.
• Keep all of your tax records for future reference, since you may need them in future years.

Key Takeaways Before You File

Your state tax refund is only taxable in the following year if it gave you a tax benefit when you claimed it. The SALT cap limits how much of your state taxes you can deduct, and that cap often changes the outcome of how much of your refund is taxable.

Checking last year’s return matters more than the amount of your state tax refund, since how you filed and the deductions you claimed will determine what portion, if any, of your return is taxable. If any portion of your state return is taxable, you will need to report it when you file the next year’s taxes.

State tax refunds can get tricky, so don’t hesitate to reach out to a tax professional for help if you need it.

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