A refund of state or local income tax is not taxable if you did not previously claim the tax as an itemized deduction in a prior year. For example, if you claimed the standard deduction on your 2011 return and in 2012 you received a refund for state tax withheld from your 2011 wages, the refund is not taxable on your 2012 return.
If in 2012 you received a refund for state or local income tax that you claimed as an itemized deduction for a prior year, the taxable portion of the refund depends on the amount of the state/local general sales tax that you could have deducted in lieu of the state/local income tax (16.3). In general, the full amount of the refund is taxable for 2012 if it is less than the excess of the state/local income tax claimed as a deduction in the prior year over the state/local general sales tax that you could have but did not deduct. If the refund is more than the excess, the amount subject to tax is limited to the excess. For example, on your 2011 return, you claimed an itemized deduction for $11,000 in state/local income taxes, as this exceeded your payment of $10,000 in state/local general sales taxes. If in 2012 you received a $750 refund of 2011 state income tax, the entire refund would be taxable, since it is less than the $1,000 excess of the state/local income taxes over the state/local general sales taxes for 2011. However, if the refund had been $2,500 instead of $750, only $1,000 of the refund would be includible in 2012 income ($11,000 deduction minus $10,000 in state sales tax that could have been deducted).
If you were— | 2011 standard deduction was— |
Married filing jointly | $ 11,600 |
Single | 5,800 |
Head of household | 8,500 |
Married filing separately | 5,800 |
Qualifying widow or widower | 11,600 |
Single age 65 or over | 7,250 |
Single and blind | 7,250 |
Single age 65 or over and also blind | 8,700 |
Married filing jointly with: | |
One spouse age 65 or over | 12,750 |
Both spouses age 65 or over | 13,900 |
One spouse blind under age 65 | 12,750 |
Both spouses blind under age 65 | 13,900 |
One spouse age 65 or over and also blind | 13,900 |
One spouse age 65 or over and other spouse blind and under age 65 | 13,900 |
One spouse age 65 or over and also blind; other spouse blind and under age 65 | 15,050 |
Both spouses age 65 or over and also blind | 16,200 |
Qualifying widow or widower age 65 or over | 12,750 |
Qualifying widow or widower and blind | 12,750 |
Qualifying widow or widower age 65 or over and also blind | 13,900 |
Head of household age 65 or over | 9,950 |
Head of household and blind | 9,950 |
Head of household age 65 or over and also blind | 11,400 |
Married filing separately age 65 or over* | 6,950 |
Married filing separately and blind* | 6,950 |
Married filing separately age 65 or over and also blind* | 8,100 |
*If on your 2011 return you claimed your spouse as an exemption (21.2), add $1,150 if he or she was either blind or age 65 or older; add $2,300 if he or she was both blind and age 65 or older.
Similarly, if in 2011 you deducted state/local general sales taxes in lieu of state/local income taxes, and you received a sales tax refund in 2012, the IRS generally requires you to include the entire sales tax refund in your income if it is less than the excess of your sales tax deduction over the income tax deduction that could have been deducted.
The amount subject to tax could be further reduced because of the standard deduction limit discussed below.
Note: If your itemized deductions in the earlier year were subject to the overall reduction (13.7), follow the IRS method in Publication 525 for determining the taxable portion of a refund.
If the refunded state tax was claimed as an itemized deduction but you were subject to the alternative minimum tax (AMT) for that year, the deduction was not allowable for AMT purposes (23.2). The refund is taxable only if the deduction gave you a tax benefit in the prior year. To determine if there was a tax benefit, you must recompute regular tax liability and AMT for the prior year after increasing your income by the refunded amount. If the recomputation does not increase your total tax, there was no tax benefit and the refund is not taxable. If your total tax increases by any amount, the deduction gave you a tax benefit and the refund is taxable to the extent that the deduction reduced your tax in the prior year.
The taxable portion of a refunded state tax cannot exceed the standard deduction limit. You include in income the lesser of the refund or the excess of your itemized deductions for the prior year over the standard deduction that could have been claimed.
The standard deduction limit applies to your total recoveries where you had other recoveries in addition to a refund of state tax (11.6).
If in 2012 you received a refund of state or local income taxes and also a recovery of other deductions, and only part of the total recovery is taxable, you allocate the taxable amount of the recovery according to the ratio between the state income tax refund and the other recovery. You do this by first dividing the state income tax refund by the total of all itemized deductions recovered. The resulting percentage is then applied to the taxable recovery to find the amount to report as the unrefunded state income tax on Line 10 of Form 1040; other taxable recoveries are reported on Line 21.
If you pay estimated state or local income taxes, your last tax installment may be in the year you receive a refund. In this case, you allocate the refund between the two years; see the following Example.
3.146.107.89