Are State Tax Refunds Taxable?

Are state refunds taxable? It depends on how you filed last year. 

If you itemized deductions on your prior year federal tax return, you may have claimed paid state and local income taxes as a deduction. If you got a refund of the state taxes you claimed as a deduction, your state refund may be taxable. You might need to report your state tax refund as income on your federal return because of how tax deductions work.

But if you took the standard deduction on your federal tax return last year—or you itemized but claimed sales tax or property tax instead of income tax—the answer is no, your state refund is not taxable.

Planning to itemize this year? Changes to the State and Local Tax (SALT) deduction may benefit you if your state has high taxes. While previously capped at $10,000, it’s been increased to $40,000 for tax year 2025 and will be indexed annually through 2029.

Let’s discuss more about taxable state refunds, changes to the SALT deduction, why you may need to report yours as income, and how TurboTax can help.

Key takeaways

• If you itemize your deductions and claim the state and local income taxes you’ve paid on last year’s tax return, your state refund may be taxable.
• If you claimed state and local sales taxes instead of income taxes, then your state refund typically isn’t taxable.
• If you received a state income tax refund last year, your state may send you Form 1099-G, which you should report on your current year tax return if you took a federal itemized deduction for your state and local income taxes last year, and it lowered your taxes.
• The One Big, Beautiful Bill has increased the SALT deduction cap from $10,000 to $40,000 in 2025, $40,400 for 2026, and then an additional 1% each year through 2029.

When is a state tax refund taxable?

Did you itemize deductions on last year’s federal income tax return? And did you claim a deduction for state income tax paid on your Schedule A (Form 1040 line 5a), Itemized Deductions?

If so, your state income tax refund may be taxable.

Generally speaking, you’ll only owe taxes on your state refund if you get a tax benefit from deducting too much state tax the prior year. For example, if you deducted $5,000 in state income taxes but received a $1,000 state refund, the IRS considers that $1,000 taxable because you received a tax benefit from the $5,000 deduction in the prior year.

In this case, you’ll need to include that refund on the following year’s federal income tax return.

When it’s not taxable

Your state income tax refund is not taxable if: 

• You claimed the standard deduction instead of itemizing on your prior year federal tax return.  
• You didn’t claim a deduction for state and local income taxes paid on your prior year federal tax return.

A state tax refund is only taxable when the refund itself makes your itemized deduction larger than the amount you would have received by taking either the standard deduction or claiming general sales tax.

If your state tax deduction was limited by the cap on State and Local Tax (SALT) deduction, only the refund in excess of the limit would be taxable. As of July 4, 2025, the OBBB has increased this cap substantially from $10,000 to $40,000 for 2025.

Does this apply to sales tax refunds?

Sales tax and state and local income tax follow different tax rules. Even if you itemized deductions last year, your refund won’t be automatically Sales tax and state and local income tax follow different tax rules. Even if you itemized deductions last year, your refund won’t be automatically taxable.

It will depend on the state tax deduction you actually claimed.

If you deducted state and local general sales tax on last year’s tax return (rather than state and local income taxes), your state income tax refund won’t be taxable when you file this year.

Note: Sales tax is generally not deductible unless you deduct sales tax instead of state income tax on your federal income tax return. If you claimed a deduction for sales tax paid on a major purchase and later got a refund for that sales tax, that refund is NOT taxable because it is not related to income tax.

How does the OBBB affect how much of my state income tax I could potentially write off?

If you live in a state with high taxes, you may benefit from the SALT deduction changes established by the OBBB. One of the provisions of the OBBB was a temporary increase of the cap for state and local taxes. The SALT deduction updates are:

• For 2025: The cap increases from $10,000 to $40,000.
• For 2026: The cap increases to $40,400.
• For 2027 through 2029: The cap will increase by an additional 1% each year.

The deduction phases out for single and married filing joint taxpayers earning more than $500,000 and $250,000 for those who are married filing separately.  Even with the phaseout limits, your SALT deduction will never go below $10,000.

Do I need to report my state and local income tax refund on my tax return?

Here’s a breakdown of this situation:

• If you itemized deductions on your prior year federal return, and claimed state and local income tax paid as part of those deductions, it lowered your federal taxable income.  
• After completing your prior year federal return and filing your prior year state return, you were eligible for a state tax refund. This means you receive a refund of the state tax you just deducted on the federal return. 
• Instead of amending your prior year federal return to account for the state refund, you’ll report the state refund as income on your federal tax return for the year you receive the refund. This is typically done using information provided on Form 1099-G. 

What do I do if I receive Form 1099-G?

Your state may send you Form 1099-G if you received a state income tax refund last year. This form reports any income you received as a refund, credit, or offset of state or local income tax. You can find this amount in Box 2. 

Just because you receive Form 1099-G doesn’t mean you owe money. For example, you generally won’t owe anything if you claimed the standard deduction on last year’s tax return.

However, the amount reported on Form 1099-G may be partially or fully taxable if you:

• Itemized deductions last year, and 
• Deducted state and local income tax 

You should report your 1099-G if: 

• You took a federal deduction for paying state and local income tax in a prior year 
• The deduction for state and local income tax lowered your overall federal taxes 

Don’t worry about learning all these tax rules. Enter Form 1099-G, and TurboTax will report Form 1099-G as income if applicable.

Are refundable state tax credits taxable?

Most tax credits are nonrefundable. They can potentially lower your income tax to $0, but they don’t result in a refund. Nonrefundable tax credits aren’t taxable.

Refundable tax credits, meanwhile, could get you a refund even if you don’t owe taxes. If you receive a refundable state tax credit that exceeds your tax liability and creates a tax refund, it may be federally taxable.

Say your state offers a $1,000 refundable tax credit, and you owe $500 in taxes. You’ll get a $500 refund. That $500 may be taxable income on your federal tax return. Again, it depends on how you claimed deductions on the prior year federal return.

How TurboTax helps you report state refunds

TurboTax can help you with your state taxes. Our software automatically determines if your state tax refund is taxable. Whether you’d prefer to do your taxes yourself with an expert at your side or have an expert do your taxes for you, TurboTax helps you get the biggest federal and state refund possible.