Line 10: Taxable RefundsYour 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 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. You may want to figure the taxable portion 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 to the standard deduction you could have taken. Using a calculator, enter the amount of your itemized deductions, and subtract the standard deduction you could have taken instead. The result is the 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. See the Recoveries[/link section of IRS Publication 525.