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Start with the federal return for the year the refund relates to
A state refund is a recovery of taxes you may have deducted on an earlier federal return. Under the federal tax-benefit rule, include a recovery only to the extent the earlier deduction reduced your federal tax. That means the refund is not automatically taxable just because you received it or received Form 1099-G.
- You took the standard deduction: You generally do not report a state income tax refund as federal income if the refunded expense could only have been claimed as an itemized deduction.
- You itemized deductions: The refund may be partly or fully taxable, but itemizing alone does not make the entire refund taxable. The amount depends on the benefit you received from the earlier deduction and the applicable IRS worksheet.
The IRS explains the tax-benefit rule in Publication 525 and addresses Form 1099-G refunds in its taxable and nontaxable income FAQ.
How to work out whether any refund is taxable
- Identify the tax year and payments behind the refund. A refund may relate to state taxes paid in a different year from the state return or refund year.
- Find the federal return on which those taxes were claimed. Check whether you itemized or took the standard deduction for that year.
- If you itemized, use the IRS worksheet for the filing year. For the ordinary case covered by the 2025 edition of Publication 525—a refund received in 2025 for state or local income taxes paid in 2024 by a Form 1040 or 1040-SR filer—the IRS directs taxpayers to the State and Local Income Tax Refund Worksheet in the Schedule 1 instructions. Use the instructions for the actual return year; forms and worksheets can change.
- Check for special circumstances before using the ordinary worksheet. Publication 525 directs taxpayers with certain other facts to its Itemized Deduction Recoveries discussion and Worksheet 2 instead.
The worksheet accounts for details such as how much your itemized deductions exceeded the standard deduction. It applies the tax-benefit rule; it does not simply treat the Form 1099-G amount as taxable income.
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Situations that can change the calculation
The ordinary worksheet may not fit if your refund or earlier return involves special circumstances. Publication 525 identifies cases including:
- A refund for a tax year other than the immediately preceding year.
- A refund that is not for income tax.
- Alternative minimum tax (AMT) or credits that reduced tax to zero or were unused.
- An election to deduct general sales taxes instead of state and local income taxes.
- A final estimated payment for 2024 made in 2025.
- Being claimed as a dependent, or a change in joint filing status.
If you chose between deducting state and local income taxes and general sales taxes, the amount potentially included is limited by the excess of the tax you deducted over the tax you could have deducted instead. For other listed circumstances, follow the relevant year’s IRS recovery instructions rather than assuming the standard calculation applies.
Refunds tied to payments made in more than one year
When a refund includes state tax payments from multiple calendar years, allocate the recovered amount among those years before applying the recovery rules. In a worked example, Publication 525 allocates a $400 refund as $300 attributable to payments in 2024 and $100 attributable to a January 2025 payment. The example treats the first portion as a possible recovery of an earlier deduction and the second as a reduction to the 2025 deduction; those figures illustrate that example, not a general rule about refund amounts.
A prior joint return followed by a non-joint return
If the earlier state return was joint but your current federal return is not joint with the same person, allocate the refund to the person who paid the expense. If both people paid, the allocation is based on each person’s share.
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Report refund interest separately
Interest paid on a state or local income tax refund is interest income in the year you receive it, even if the refund principal is not taxable. For the 2025 guidance, Publication 525 says to report state refund interest on Form 1040, 1040-SR, or 1040-NR, line 2b.
What Form 1099-G does—and does not—tell you
Form 1099-G reports a government payment; it does not decide that every dollar of a state refund is taxable. The IRS FAQ says taxability depends on whether you itemized deductions in the year the refund relates to, and an itemizer may have to include all or part of the refund.
For a 2025 state or local income tax refund, Publication 525 says the payer should send Form 1099-G by January 31, 2026, and that the IRS also receives a copy. Use the form to check the payment amount, then apply the rules for the federal return year in which you received the refund.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Where a taxable refund goes on the return
For 2025 returns, Publication 525 directs a reportable state or local income tax refund to Schedule 1 (Form 1040), line 1. Confirm the line and instructions for the filing year you are preparing, because annual forms can change. Refund interest is reported separately as interest income, not as part of the refund recovery.
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These are federal income tax rules. Whether a refund is taxable on a state return depends on the rules of the state involved.
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