Your federal tax refund is not taxable income
A refund of federal income tax you overpaid is not subject to federal income tax. The IRS treats it as a return of money that was already yours — you paid too much during the year through withholding or estimated tax payments, and the refund corrects that overpayment. You do not owe tax on the refund itself.
The same rule applies to state income tax refunds in most states. A refund of state taxes you overpaid is generally not taxable by that state. However, a few states tax refunds of state income tax under specific circumstances, and some states tax refunds of federal income tax. The rules vary by state and depend on which tax year the refund covers.
Key Takeaways
- Federal income tax refunds are never taxable as federal income, regardless of the amount or the year the refund covers.
- State income tax refunds are usually not taxable by that state, but a handful of states tax refunds under certain conditions.
- If you deducted state and local taxes (SALT) on your federal return in the year you overpaid, you may owe federal tax on the refund you receive the following year.
- The IRS sends Form 1099-G if your refund exceeds $10, and you must report it on your federal return only if you claimed the SALT deduction.
When a state income tax refund becomes federally taxable
You may owe federal income tax on a state income tax refund if you claimed the state and local tax (SALT) deduction on your federal return in the year you overpaid the state tax. This happens because you deducted the state tax as an expense, lowering your federal taxable income. When the state refunds part of that tax the next year, the IRS treats the refund as income in the year you receive it.
The taxable amount is only the portion of the refund that relates to taxes you deducted. If you took the standard deduction instead of itemizing, or if you did not deduct state taxes, the refund is not federally taxable. The IRS uses Form 1099-G to report refunds over $10 to both you and the federal government, so you must report it on your federal return if the 1099-G is issued to you.
This rule applies only to refunds of state income tax, not federal income tax refunds. It also does not apply to refunds of sales tax, property tax, or other state and local taxes — only income tax refunds trigger this federal tax consequence.
Which states tax their own income tax refunds
Most states do not tax refunds of state income tax. However, a small number of states — including Illinois, Indiana, and a few others — tax refunds of state income tax under certain conditions. The rules differ by state and may depend on the tax year the refund covers or the reason for the overpayment.
A separate issue is that some states tax refunds of federal income tax. This is rare and applies only in a handful of states. If you live in a state that taxes federal refunds, you would owe state tax on a federal refund you receive. You should check your state's tax authority website or contact them directly to learn whether your state taxes either type of refund.
How to report a refund on your federal tax return
If the IRS sends you a Form 1099-G for a state income tax refund over $10, you must report it on your federal return if you claimed the SALT deduction in the year you overpaid. The refund goes on Schedule 1 (Form 1040), line 1, as "Other income." You report the full amount shown on the 1099-G, even if only part of it is taxable.
If you did not receive a 1099-G, you still must report the refund if you deducted state taxes and the refund was over $10. The IRS may not have issued the form, but that does not mean the refund is not taxable. Keep your own records of refunds you receive so you can report them accurately.
If you did not claim the SALT deduction — either because you took the standard deduction or because you did not itemize — you do not report the refund on your federal return, even if you receive a 1099-G. In that case, the refund is not federally taxable income.
The difference between a refund and income from your state
A tax refund is money returned to you because you overpaid. It is not new income. However, the IRS treats it as income in the year you receive it if you deducted the tax that generated the overpayment. This is a timing issue: you reduced your federal taxable income in year one by deducting state taxes, and you increase it in year two when you receive the refund.
This does not mean you are taxed twice on the same money. In year one, you deducted the state tax and paid less federal tax. In year two, you report the refund as income and pay federal tax on it. Over both years, the net effect depends on your tax bracket and whether the refund was the full amount you deducted or only part of it.
What to do if you receive a 1099-G
The IRS issues Form 1099-G to report refunds of state and local taxes, unemployment benefits, and other payments. If you receive a 1099-G for a state income tax refund, check the amount and make sure it matches your records. The form will show the refund in box 2.
If the amount is wrong, contact your state tax authority first. They issued the refund and can correct it. If the state corrects the amount, they will issue a corrected 1099-G. Once you have the correct form, report it on your federal return as described above — but only if you deducted state taxes in the year you overpaid.
Keep a copy of the 1099-G with your tax records. If you file electronically, the IRS already has a copy from your state, so make sure the amount you report matches the form.
Frequently Asked Questions
Do I have to report a federal income tax refund on my next year's tax return?
No. A federal income tax refund is never taxable income, and you do not report it on any tax return. The IRS does not issue a 1099-G for federal refunds, and there is no line on your return for them.
What if I got a refund but did not receive a 1099-G?
The IRS issues 1099-G only for refunds over $10. If your refund was $10 or less, you will not receive a form. You still must report refunds over $10 if you deducted state taxes, even without a 1099-G. Check your state's records or your bank statement to confirm the amount.
Can I avoid owing federal tax on a state refund?
If you took the standard deduction instead of itemizing, you do not owe federal tax on a state refund. The tax consequence only applies if you deducted state taxes on your federal return in the year you overpaid. If you itemized but did not deduct state taxes for some reason, the refund is also not taxable.
Does a federal refund count as income for means-tested programs?
Federal tax refunds generally do not count as income for programs like SNAP, Medicaid, or housing assistance, because they are treated as a return of your own money, not new income. However, some programs may count refunds received in a specific month toward that month's income. Check with the program administrator about their specific rules.