State tax refunds are taxable income only if you deducted state taxes on your federal return the year you paid them
Whether your state tax refund is taxable depends on a single fact: did you deduct state income taxes on your federal return in the year you paid those state taxes? If you did, the refund counts as federal taxable income. If you didn't, it doesn't. This rule exists because the tax code doesn't let you deduct an expense and then ignore the refund of that same expense.
The IRS calls this the tax benefit rule. You get a tax benefit when you deduct state taxes on your federal return—that benefit lowers your federal tax bill. When the state refunds part of those taxes, you're getting back money that already reduced your federal taxes. The IRS treats that refund as income to restore the benefit you received.
Your state will send you a Form 1099-G if your refund is $10 or more. This form reports the refund amount to both you and the IRS. You'll report it on your federal return, usually on Form 1040, Schedule 1, as "other income."
Key Takeaways
- A state tax refund is taxable federal income only if you deducted state income taxes on your federal return in the year you paid those state taxes.
- The IRS sends you a Form 1099-G when a state refund is $10 or more, and you must report it as income on your federal return.
- If you took the standard deduction instead of itemizing, your state refund is not taxable because you received no tax benefit from paying state taxes.
- The refund is taxable in the year you receive it, not the year you paid the original state taxes.
- Some states do not have income tax, so residents of those states will never receive a state income tax refund.
How the standard deduction affects whether your refund is taxable
Most people take the standard deduction on their federal return instead of itemizing deductions. If you took the standard deduction, you did not deduct state income taxes, so your state refund is not taxable. You receive the refund tax-free.
Only people who itemize deductions on Schedule A can deduct state income taxes. Itemizing means listing out specific deductions—mortgage interest, property taxes, charitable donations, and state income taxes—instead of taking the standard deduction. The standard deduction is usually larger, so most households use it. If that's you, your state refund carries no federal tax consequence.
You can check your prior-year return to see which method you used. Look at Form 1040. If you filed Schedule A, you itemized. If you didn't file Schedule A, you took the standard deduction.
When you receive the refund versus when you paid the taxes
The year that matters for the tax benefit rule is the year you paid the state taxes, not the year you receive the refund. If you paid state taxes in 2023 and deducted them on your 2023 federal return, then received a refund in 2024, the refund is taxable on your 2024 federal return.
This timing matters because you might have itemized in 2023 but taken the standard deduction in 2024. In that case, the 2023 refund (received in 2024) is still taxable, because you got a tax benefit in 2023 when you deducted those taxes. The fact that you don't itemize in 2024 doesn't change the rule.
The Form 1099-G you receive will show the year the refund was issued. Report it on the federal return for that year.
State income tax refunds in states with no income tax
Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest income, not wages). Residents of these states do not pay state income tax and will not receive state income tax refunds.
If you moved to one of these states during the year, you may have paid income tax to your previous state for the months you lived there. Any refund from that previous state follows the same rule: it's taxable on your federal return only if you deducted it on your federal return in the year you paid it.
What to do if you receive a Form 1099-G
When your state refund is $10 or more, the state will issue a Form 1099-G and mail it to you and the IRS by January 31 of the following year. You'll receive it in the mail or through your state's online tax portal.
Report the amount shown on Box 1 of the Form 1099-G on your federal return. Most people report it on Form 1040, Schedule 1, Line 1 (Other Income). If you used tax software, it will usually prompt you to enter this amount when you input the 1099-G information.
Keep the Form 1099-G with your tax records. The IRS has a copy, so the amount will be cross-checked against your return. If you don't report it and the IRS notices the mismatch, you may receive a notice asking for the missing income.
Partial refunds and amended returns
Sometimes you receive a partial refund—the state keeps part of what you overpaid. Only the amount actually refunded to you is taxable. The Form 1099-G will show the exact refund amount.
If you filed an amended federal return for the year you paid the state taxes (for example, you filed an amended 2023 return in 2024), and that amendment changed whether you itemized, you may need to file an amended return for the year you received the refund. This is rare but can happen. A tax professional can help you sort this out if your situation is complex.
Frequently Asked Questions
Do I have to report a state tax refund if it's under $10?
The state will not send you a Form 1099-G if the refund is under $10, but you are still required to report it as income on your federal return if you deducted state taxes in the year you paid them. The $10 threshold is only for when the state issues the form, not for your reporting obligation.
What if I didn't receive a Form 1099-G but I know I got a refund?
Contact your state tax agency to confirm the refund amount. You can usually check your account online or call their taxpayer service line. Once you have the amount, report it on your federal return even if you don't have the form. The IRS may have a copy on file.
Can I deduct my state income tax refund as a loss?
No. A refund is treated as income, not a loss. You cannot offset it by claiming a deduction. The tax benefit rule works one direction: if you got a deduction, the refund is income. If you didn't get a deduction, the refund is not income.
Is a state tax refund taxable if I owe federal taxes?
Yes. The refund is taxable income regardless of whether you owe federal taxes or are due a refund. However, if you owe back taxes or other federal debts, the IRS may offset your state refund before it reaches you—meaning the federal government intercepts it to pay what you owe.
What if I moved states during the year?
You may have paid income tax to two states. Any refund from either state follows the same rule: it's taxable on your federal return only if you deducted state income taxes on your federal return in the year you paid those taxes. Each refund is reported separately on your federal return.