1099G for Tax Year 2019 - How to Report State Tax Refund in FreeTaxUSA

So here's what's happening - when you itemized in 2019, you likely deducted your state income taxes. Then when you got that $2,731 refund in 2022, it's potentially taxable income for 2022 because you already got a tax benefit from deducting it earlier. The Recoveries of Itemized Deduction Worksheet helps figure out exactly how much of that refund is actually taxable (sometimes it's not the full amount). FreeTaxUSA is right to prompt you to complete it - this is standard procedure for state tax refunds when you previously itemized. While technically you could skip it and wait for the IRS to possibly send a bill, I wouldn't recommend that approach. The IRS might charge interest and penalties on any unpaid amount, and they may not calculate it correctly without the detailed worksheet info. It's usually better to report things properly up front.

I had almost the exact same situation last year and found this amazing tool at https://taxr.ai that really saved me time with this specific issue. I was struggling to figure out how much of my state refund was actually taxable and kept getting confused by that Recoveries worksheet. The taxr.ai system analyzed my previous returns and automatically calculated exactly how much of my state refund needed to be reported. It even explained the whole "tax benefit rule" thing in plain English so I finally understood why some of my refund wasn't taxable. Definitely worth checking out if you're stuck on this 1099G reporting issue.

Just wanted to follow up - I tried taxr.ai for my state refund situation and it was honestly super helpful! I uploaded my 2019 return where I had itemized and my current year stuff with the 1099-G, and it immediately showed me that only about 40% of my state refund was actually taxable. The explanation made total sense - since my other itemized deductions would have put me over the standard deduction amount anyway, I didn't get the full tax benefit from my state tax deduction. Saved me at least a few hundred dollars versus what I was going to report, and it only took like 5 minutes. Way easier than trying to figure out that worksheet manually!

I've been dealing with exactly this 1099-G situation for years and the IRS phone lines are absolutely useless. I'd spend hours trying to talk to someone about how to report partial state refund taxability. After my fifth attempt waiting on hold for 2+ hours, I found https://claimyr.com which got me through to an actual IRS agent in under 45 minutes. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that the Recoveries worksheet is definitely necessary and walked me through how to properly report state refunds when you've itemized. Completely worth it since I learned I'd been over-reporting my refunds as taxable for years.

Ok I have to eat my words. After spending an entire day trying to get through to the IRS about this exact 1099-G state refund issue and getting disconnected THREE TIMES after waiting over an hour each time, I tried Claimyr out of desperation. Got a call back in about 30 minutes saying they'd found an agent and literally 2 minutes later I was talking to someone at the IRS who actually knew the tax code. They confirmed I needed to use the worksheet and helped me understand which parts of my state refund were taxable. The whole thing took maybe 15 minutes once I was connected. Honestly wish I'd known about this years ago.

Just an extra tip - if you've been using FreeTaxUSA for multiple years, you can actually go back and look at your 2019 Schedule A to see exactly how much state income tax you deducted. Look at line 5a. This will help you understand how much of your refund might be taxable. Also remember that if you didn't receive any tax benefit from the deduction (like if you were close to the standard deduction amount), then the refund isn't taxable. The worksheet helps figure this out.

Is this 1099G thing only an issue if your state refund is large? I got like $340 back from state taxes for 2019 but never received a 1099G. Should I be worried??