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Is your State Income Tax Refund Taxable?

Posted: July 21, 2019

The Tax Cuts and Jobs Act has resulted in less state income tax refunds being subject to federal income tax.  This is because none of your refund is taxable if, in the year you paid the tax, you either (a) didn't itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes.  

The Tax Cuts and Jobs Act imposes a $10,000 limit on the deduction of all state and local taxes.  As a result, many individuals have exhausted the $10,000 of deductions simply with the deduction of property taxes and other state or local taxes, so they no longer deduct state income tax.  If the state income tax wasn't deducted when it was paid, then it is not taxable when it is refunded.  

So, when you get your Form 1099-G reporting your state income tax refund, don't just slap it on your federal tax return as taxable income.  Make sure you first check whether you deducted it when it was paid, because if you did not, the refund is not taxable.

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