To calculate the taxable portion of a state tax refund, take the smaller of two numbers: the refund itself, or the amount by which your prior year’s itemized deductions exceeded the standard deduction for your filing status. If you took the standard deduction that year, none of the refund is taxable and you can stop there.
Check Whether You Owe Anything at All
Most people don’t. Before running any math, confirm none of these applied to you in the year the refund relates to:
- You took the standard deduction. Your state tax payments never reduced your federal taxable income, so the refund recovers nothing federal.1Internal Revenue Service. Taxable Refunds, Credits or Offsets of State or Local Income Taxes
- You itemized but chose to deduct state general sales taxes instead of state income taxes. You never deducted the income taxes, so the income tax refund isn’t taxable.2Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
- Your other itemized deductions alone already fell short of the standard deduction, meaning the state tax line gave you no marginal benefit. This one isn’t obvious on its face and comes out of the calculation below.
If none of those exits apply, keep going.
Pull Three Numbers From Your Prior Year Return
You’ll need your prior year’s Form 1040 and Schedule A in front of you.
Total itemized deductions. Schedule A, line 17. Use the final total after any limitations.
Standard deduction for that year and filing status. For tax year 2026, the standard deduction is $32,200 for married filing jointly, $16,100 for single filers and married filing separately, and $24,150 for head of household.3Internal Revenue Service. Rev. Proc. 2025-32 If the refund relates to 2025, use the 2025 amounts. If you or your spouse were 65 or older or blind that year, add the additional standard deduction before comparing. For 2026, single filers and heads of household add $2,050 per qualifying condition, and married taxpayers add $1,650 per qualifying individual per condition.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Missing this addition is a common way people overstate their taxable refund.
State income tax refund you received. Box 2 of Form 1099-G, sent by your state by January 31.5Internal Revenue Service. Form 1099-G – Certain Government Payments
Do the Comparison
Subtract the standard deduction from your total itemized deductions. That difference is the most benefit itemizing could have given you, and it’s the ceiling on how much of the refund can be taxable. If it comes out to zero or a negative number, itemizing didn’t beat the standard deduction and the refund isn’t taxable.
Say you filed married filing jointly for 2025 with $37,000 in itemized deductions and the applicable standard deduction was $31,500. The excess is $5,500.
Now compare that ceiling to the refund. The taxable portion is whichever is smaller.
- Refund of $2,400, ceiling of $5,500: report $2,400.
- Refund of $8,000, ceiling of $5,500: report $5,500.2Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
For simple returns, that’s the answer. Two situations can pull the taxable number down further.
Two Adjustments That Can Reduce the Taxable Amount
The SALT Cap
Taxes you paid but couldn’t deduct gave you no federal benefit, so a refund tied to that non-deducted portion isn’t taxable. For 2026, the combined deduction for state and local income (or sales) taxes and property taxes is capped at $40,400 for most filing statuses and $20,200 for married filing separately, phasing down at 30 cents per dollar of modified adjusted gross income above $505,000 but never below $10,000.
If you paid $52,000 in combined state and local taxes but could only deduct $40,400, the extra $11,600 produced no tax reduction. A refund that falls within that unused amount isn’t taxable.6Internal Revenue Service. IRS Issues Guidance on State Tax Payments The detailed worksheet in Publication 525 walks through the gap between total taxes paid and the amount that actually landed on Schedule A.2Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income
The Sales Tax Alternative
Even though you chose to deduct state income taxes, the sales tax option you didn’t take still caps the taxable refund. The maximum taxable amount is the difference between the income tax deduction you claimed and the sales tax deduction you could have claimed instead.
Suppose you deducted $12,000 in state income taxes, could have deducted $11,200 in sales taxes, and your refund is $3,000. Only $800 can be taxable, because that’s the piece of the income tax deduction that beat the sales tax alternative. The other $11,200 was available either way.2Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income Sales tax figures come from actual receipts or the IRS sales tax tables by income and state; most software runs the comparison automatically.
When either adjustment applies, use Worksheet 2 in Publication 525 or the State and Local Income Tax Refund Worksheet in the Form 1040 instructions rather than the simple comparison above.
Where It Goes on the Return
Report the taxable portion on Schedule 1 (Form 1040), line 1, “Taxable refunds, credits, or offsets of state and local income taxes.”7Internal Revenue Service. Schedule 1 (Form 1040) 2025 – Additional Income and Adjustments to Income Schedule 1 flows to the main Form 1040.
Do not just copy Box 2 of your 1099-G onto the return. Box 2 shows the full refund, not the taxable portion.5Internal Revenue Service. Form 1099-G – Certain Government Payments Enter the number you calculated. This is a common hand-preparation error.
Interest on the Refund Is Separate
If your state paid interest on a late refund, that interest is not part of this calculation. It’s ordinary interest income, reported to you on Form 1099-INT, and taxable regardless of whether the underlying refund is.8Internal Revenue Service. Topic No. 403, Interest Received Even if you took the standard deduction and owe nothing on the refund itself, you still owe tax on any interest.
What Happens If You Skip It
The IRS receives a copy of every 1099-G. Omitting income shown on an information return is listed as an example of negligence and carries an accuracy-related penalty of 20% of the underpaid tax, plus interest running from the original filing deadline.9Internal Revenue Service. Accuracy-Related Penalty If you believe none of the refund is taxable, run the calculation, keep the worksheet with your records, and report the correct amount rather than ignoring the form.