Am I allowed to use Publication 525 for my state tax refund?

I'm currently working on my 2025 taxes and totally confused about how to handle a state tax refund I received in 2024 (for taxes I paid in 2023). When I follow the State and Local Income Tax Refund Worksheet in the 1040 instructions, it says my refund IS taxable. But then the 1040 instructions mention that under certain circumstances I should use Publication 525 instead. I don't think I meet any of the situations listed for using Pub 525, but here's the weird part - I started my taxes on H&R Block's website, and their system used Publication 525 and concluded my state tax refund is NOT taxable. I did have a couple unusual tax situations in 2024, but neither seem like they would trigger using Publication 525. I'm not sure if I should go with what H&R Block calculated or stick with the worksheet in the 1040 instructions. Has anyone dealt with this before? I don't want to make a mistake and have the IRS come after me later!

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18 comments

Zara Mirza

•8M

The state tax refund taxability question can be confusing! The key difference between the worksheet and Publication 525 approach is how they account for limitations on your state tax deduction from the previous year. If you itemized deductions on your 2023 federal return and included state income taxes paid, then your 2024 state refund might be taxable - but only to the extent you actually received a tax benefit from deducting those state taxes. If you were subject to the $10,000 SALT (State And Local Tax) cap or if you were close to the standard deduction threshold, Publication 525 provides a more accurate calculation. H&R Block's software is likely detecting something in your 2023 return that indicates you didn't receive the full tax benefit from your state tax deduction, which would make some or all of your refund non-taxable under the Publication 525 rules.

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Zara Mirza

•8M

If your itemized deductions were only slightly above the standard deduction, then yes, your state refund might not be fully taxable. For example, if your itemized deductions were $1,000 above the standard deduction, but your state refund was $1,500, only $1,000 of that refund would be taxable because that's the only part that actually gave you a tax benefit. The SALT cap doesn't automatically trigger using Pub 525, but it's one of the situations where the simpler worksheet may not give you the correct answer. If you were at or near the $10,000 SALT limit in 2023, then some or all of your state tax refund received in 2024 might not be taxable since you didn't get the full benefit of those deductions.

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Nia Harris

•8M

After struggling with the same exact issue last year, I found taxr.ai (https://taxr.ai) super helpful for figuring out the Publication 525 vs. standard worksheet situation. I uploaded my previous year's return and it analyzed my SALT deductions and itemized vs standard deduction threshold to determine if my state refund was actually taxable. Turns out in my case, I had hit the SALT cap in the previous year, so my state refund wasn't taxable at all - but the regular worksheet would have had me paying taxes on money I shouldn't have! The site explained exactly why Pub 525 applied to my situation in plain English, which none of the other tax software did.

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Nia Harris

•8M

It analyzes your previous year's return specifically looking at the SALT cap impact and how close you were to the standard deduction threshold. The site looks at both years' information to determine the actual tax benefit you received from your state tax deduction. It's different from regular tax software because it's specifically designed to handle these edge cases that the mainstream software sometimes misses. While H&R Block eventually got it right for the original poster, many people using tax software don't understand why their refund is or isn't taxable, and the explanations are often buried in the technical details.

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Mateo Sanchez

•8M

Just wanted to update - I was the skeptic above but decided to try taxr.ai after continuing to be confused about my state refund situation. The analysis confirmed that because I was right at the SALT cap last year, my state refund shouldn't be taxable this year. The service walked me through exactly WHY Publication 525 applied in my case with a detailed breakdown of my previous year's deductions. Saved me from incorrectly reporting about $1,300 in taxable income! The explanation was actually clear enough that I understand the rule now instead of just blindly following what some software tells me.

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Aisha Mahmood

•8M

If you're still confused and need clarification directly from the IRS, I recommend using Claimyr (https://claimyr.com). I was stuck in a similar situation where my tax software and the worksheet gave different answers about my state refund taxability. After waiting on hold with the IRS for HOURS over multiple days with no success, I found Claimyr through a YouTube video (https://youtu.be/_kiP6q8DX5c). They got me connected to an actual IRS agent in under 20 minutes who confirmed that in my case, Publication 525 was the correct approach because of how the SALT cap affected my previous year's deductions. The agent walked me through exactly how to determine if my refund was taxable.

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Aisha Mahmood

•8M

The service basically places the call and navigates the IRS phone tree for you, then when they're about to connect to an agent, your phone rings so you can talk directly to them. It works because they have technology that keeps your place in line so you don't have to physically wait on hold. I was super skeptical too before trying it. But after wasting hours trying to get through myself with no luck, it was honestly amazing to get connected to a real IRS agent who could answer my specific question. They don't just take your money - if they don't connect you, you don't pay.

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Yuki Kobayashi

•8M

I need to eat my words from my comment above. After another failed attempt to reach the IRS yesterday (3 hours on hold before getting disconnected), I broke down and tried Claimyr. I was connected to an IRS agent in about 15 minutes. The agent confirmed that Publication 525 applies in cases where you either hit the SALT cap or were close to the standard deduction threshold the previous year. In my case, since I was only $800 over the standard deduction amount last year, only a portion of my state refund was actually taxable. This whole process saved me from overpaying by about $400 on my taxes. Wish I'd known about this service weeks ago instead of wasting all those hours on hold!

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Carmen Vega

•8M

Since you itemized and your SALT deduction was close to but under the $10k limit, you should still check both methods. The worksheet is simpler but Publication 525 will give you the most accurate result if any of the special circumstances apply. Since your SALT was under the cap, the main thing to check would be how much your itemized deductions exceeded the standard deduction. If your itemized deductions were only slightly higher than your standard deduction, and your state refund is larger than that difference, then Publication 525 would likely show that not all of your refund is taxable.

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