State and Local Refunds – Form 1099-G
A refund of state or local income tax paid may in total or part be considered income in the year that it is received, provided the taxpayer claimed the taxes paid as an itemized deduction on the prior year return. The taxable amount of the state or local refund includes:
- Any part of a refund from the taxpayer’s prior year state or local return that they were entitled to receive in the current year but chose to apply to their current year estimated tax payments instead.
- Any state or local refund that the taxpayer would have received in the current year but was garnished by the state or federal government to satisfy another obligation such as back taxes, student loans, etc.
None of the state or local tax refund is taxable if, in the year the tax was paid the taxpayer either (a) did not itemize deductions, or (b)elected to deduct state and local general sales taxes instead of state and local income taxes.
If a taxpayer received a refund, credit, or offset of state or local income taxes, they should receive a Form 1099-G. If the refund was for a tax that was paid in year prior to the current tax year and was deducted as state and local income taxes on the year prior to the current year’s tax return’s Schedule A, some or all of the refund may be taxable. A worksheet is provided in Keystone Tax Solutions Pro to determine the amount that is included in income. Also review the State and Local Income Tax Refund Worksheet found in the Instructions to Schedule A to determine the taxable portion of the refund.
Exception. However, when certain exceptions exist, the taxpayer may be required to treat the state or local tax refund as an Itemized Deduction Recovery in Publication 525 instead of using the worksheet. The exceptions are the following:
- The refund is for a tax year other than the year prior to the current year.
- The refund is for a tax other than an income tax refund, such as a sales or real property tax refund.
- The amount of the personal exemptions claim in the prior year exceeded the taxpayer’s prior year AGI minus their Itemized Deductions.
- The taxpayer had taxable income in the prior year but no tax due because of the 0% tax rate on net capital gains and qualified dividends.
- The taxpayer’s prior year state and local tax refund is greater than the prior year state and local income tax deduction minus the amount that the taxpayer could have deducted as the prior year state and local sales tax.
- The taxpayer made estimated state and local income tax payment for the prior year in the current year.
- The taxpayer was subject to AMT in the year prior to the current year.
- The taxpayer could not claim all of the credits they were entitled to receive in the year prior to the current year because the total credits exceeded the tax liability in that prior year.
- The taxpayer was claimed as a dependent by someone else in the prior year.
- The taxpayer received the refund in the prior year by filing jointly with a person that they are not filing a joint return in the current year.
To input state and local refunds from Form 1099-G, from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- State & Local Refunds (1099-G Box 2)
NOTE: This is a guide on entering a State or Local Tax Refund reported on a Form 1099-G into Keystone Tax Solutions Pro. This is not intended as tax advice.
Additional Information: