State Income Tax Refunds

This year I have a form 1099-G from the state of Connecticut for the amount they refunded me in 2024 on the 2023 income tax over payment. A bit of reading told me that if I itemized on my 2023 federal return, and included the state taxes in my itemized deductions, this is taxable. Which makes sense.

I use TurboTax to file both federal and state. What I am wondering is whether TT bases the number used for calculating that federal itemization on the number it calculates - in the same program - that I am paying the state. In that case I would not think the refund would be taxable, as it was not deducted. Or, is TT using the gross amount that I paid to the state, including the over payment?

After writing the above, I did some more poking around. The limit on such a deduction is $10k. Between property taxes and CT income tax I paid way, way more than $10k. So the $1600 over payment had no impact on the federal deduction.

1 Like

Not sure what questions TurboTax asked, or how you answered them, but per the 2023 Federal Schedule A instructions 2023 Instructions for Schedule A the amount of state/local income taxes included figuring the Schedule A tax deduction is supposed to include:

  • Any state/local withholding from your 2023 income
  • Any state/local taxes that you paid in 2023 for prior year returns (e.g. if you owed money instead of getting a refund)
  • Any state/local estimated payments made in 2023, including any refunds from your 2022 return that you credited toward your 2023 return
  • Mandatory contributions toward a variety of state programs, none of which apply to Connecticut

Further, the instructions specifically tell you to not reduce the amount of taxes paid by the refund you expect to get, or refund you did get.

So, the amount of state and local income taxes that you deducted did include your overpayment, assuming that you answered the interview questions correctly.

Sorry, doesn’t matter. The fact that you deducted any state and local taxes on your Federal 2023 tax return means that any state refund that you received due to that 2023 return is taxable income in the year that it was received. The SALT limit that was placed by the TCJA did not change the rule that requires you to include state tax refunds as income.

If you want to avoid having to include state tax refunds as income in the future, while deducting state and local taxes as a part of your itemized deductions, then you should strive to owe taxes to your state, rather than getting a refund. If your state has a safe harbor rule, you should see if you can use that to minimize your payments to the state.

AJ

1 Like

Thanks, AJ. I figured I was going to miss something, which is why I posted here.

I’ve always ended up with a state refund. SS doesn’t withhold for the state. When I’ve taken IRA distributions I’ve specified a % going to CT, and over the year that has to cover both the income from the IRA and SS. But that has always resulted in a refund, and the one for 2023 was large.

2025 is my first year for RMD, and I took it in one lump earlier this month. This time I actually tried to make sense of the CT numbers, and adjusted the % withheld for the state to something that might be close. (CT’s rules on calculating what is taxable income are - to me at least - somewhere between obscure and opaque.)