Taxable Refunds

Reporting Taxable Refunds on Form 1040

Your tax refund from your state government may be taxable. If you claimed the standard deduction on your federal tax return last year, your state tax refund is not taxable. You can skip Form 1040 Line 10.

If you itemized your deductions on your federal tax return last year and you claimed a deduction for State and Local Taxes, then you need to figure the taxable portion of your state refund.

Form 1040 Line 10: Taxable Refunds

You calculate the taxable portion of your state tax refund using the Tax Refund Worksheet on page 24 of the Instructions for Form 1040 (PDF).

First, get out last year's tax return. Compare your total itemized deductions (line 37 on your 2004 Form 1040) to the standard deduction you could have taken (see the chart to the left of line 37 on the 2004 form). Using a calculator, enter the amount of your itemized deductions, and subtract the standard deduction you could have taken instead. The result is the maximum taxable portion of your state tax refund.

If you received reimbursements for any other of your itemized deductions, you must calculate the taxable portion of your recovery. Use IRS Publication 525, Recoveries.