How to Report Form 1040 Taxable Refunds?

Receiving a tax refund is always a pleasure as you can do little more with the extra money. But tax refund may not be possible for all the tax payers. The IRS states that few state tax refunds are also taxable income. You need to report that taxes on the tax return form on 10th line of Form 1040 the following year.

Whether the received Refund is Taxable?

The tax payer need to report the state income tax refund, which was received last year on the federal income tax return, when the tax payer itemized the deductions on the last year federal return. When the tax payer claims the deduction for local and state taxes, then the tax payer need to find the taxable portion of their state refund, so that he or she can report it on the federal return.

When the standard deduction is claimed on the taxpayer’s last year federal return, it specifies that the tax payer did not itemize and the state refund is not taxable. But when the standard deduction is not claimed, then it becomes more complicated.

Have You Claimed the Standard Deduction? 

When you filed the Form 1040 EZ or Form 1040 A previous year, then you have claimed the standard deductions as these tax returns do not provide the option of itemizing. On other hand, when you filed the Form 1040, you have itemized. In order to have clear understanding, check the tax return of last year and see whether it has Schedule A. Because this Schedule is to calculate the itemized deductions and when you completed the Schedule A, then you itemized.

Have You Deducted Local and State Sales Taxes Instead? 

State refunds are not taxable though you itemized or if you select to deduct the local and state sales tax instead of reducing the state income tax. The refund is taxable when there is a deduction for states tax in previous year.

When you are e-filing the tax returns using the same software or the efile tax service provider, it can identify the related information and can calculate the correct taxable refund amount for the year. Else check Schedule A, line 5. When the line 5 is left blank, then your refund is not taxable. If it contains any number, and there should be a  notation to represent the local and state income taxes or general sales taxes. The general sales tax is specified as “ST”. If there is a notation ST, it refers that the refund is not taxable.

Required Documents

The tax payer requires some detailed information to complete the state refund worksheet when the tax payer need to report and pay the taxes on refund. This information can be found on the following documents.

  1. Form 1099 G, from the state, which send the refunds to you.
  2. State tax return filed last year specifies the refund amount that you received, when you did not have the Form 1099 G
  3. Form 1040 and Schedule A of last year, which contains the itemized deductions.

Reporting the Income

The taxable portion of state tax refund can be calculated using the Local and state refund worksheet on page 23 of Form 1040. This worksheet must be filed along with the tax return. Few may require Worksheet 2, Recoveries of Itemized Deductions, on page 26 pf 525 Publication, which is used when the tax filer was affected through alternative minimum tax during the past year and other circumstances. It is also applicable when the tax payers received reimbursements for itemized deductions in last years.