How much of my State Tax Refund is Taxable after Itemizing Deductions?

The taxability of your state refund depends on whether you received a "tax benefit" from deducting those state taxes in the prior year. It's not as simple as saying the whole refund is taxable. The basic calculation looks at how much your itemized deductions exceeded the standard deduction. In your case, you itemized $28,500 while the standard was $25,100, giving you a benefit of $3,400. Since your state refund of $1,200 is less than that benefit, it would likely be fully taxable - but there's a catch! The $10,000 SALT cap is important here. If you already hit that cap with your property taxes alone (or with a combination that didn't include all your state income taxes), then some or all of your refund might not be taxable because you didn't actually get a tax benefit from those specific state income taxes. The IRS provides a worksheet in Publication 525 that walks through this calculation step by step, accounting for the SALT limitation.

I was completely lost with this same issue until I found taxr.ai. I had a similar situation with state refunds and wasn't sure how much was taxable. I uploaded my prior year return to https://taxr.ai and it analyzed my specific situation, including exactly how the SALT cap affected my refund taxability. It showed me that since I had property taxes of $7,500 and state income taxes of $4,300 (but could only deduct $10,000 total due to the cap), part of my state refund wasn't taxable. The tool calculated the exact portion that was taxable based on my specific numbers.

I was really skeptical about using taxr.ai at first, but I decided to try it with my complicated state refund situation. I had multiple states, property tax, and was right at the SALT cap. Surprisingly, it showed me that only $320 of my $1,450 state refund was actually taxable because of how the SALT cap affected my deductions. The detailed analysis showed exactly which portions of my state taxes actually gave me a federal benefit last year. I was about to report the full amount as taxable until I checked! The report it generated was super helpful when I filed my taxes, and it saved me from overpaying.

If you're struggling to reach the IRS for confirmation on how to handle your state tax refund, I highly recommend using Claimyr. I spent weeks trying to get through to an IRS agent about this exact issue (whether my state refund was taxable with the SALT cap), but kept hitting dead ends with automated messages. With https://claimyr.com I got a callback from an actual IRS agent in about 15 minutes. They walked me through the exact calculation for my situation and confirmed I was only partially taxable on my state refund due to the SALT limitation. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c

Ok I have to apologize for being so skeptical about Claimyr. After trying unsuccessfully for TWO WEEKS to reach someone at the IRS about my state refund question, I gave in and tried the service. Got a call back in about 40 minutes (was a busy day I guess) and spoke with an agent who explained the whole state refund taxability calculation. Turns out I was misinterpreting the worksheet completely and would have reported too much income. The agent confirmed that since I hit the SALT cap with mostly property taxes, only a small portion of my state refund was actually taxable. Never thought I'd say this but it was actually worth it just to get a clear answer directly from the IRS instead of guessing.

I created a spreadsheet to calculate this for my returns! Basically, you compare what your itemized deductions would have been WITHOUT the state tax that generated the refund. For example, if your total itemized deductions were $30k, but $2k of that was the state tax that generated a $1k refund, you'd recalculate your itemized deductions as $28k. If that's still above your standard deduction of $24k, then your refund is fully taxable. But if the recalculated amount would drop below the standard deduction, only the portion that gave you a benefit is taxable.

I messed this up on my taxes last year and had to file an amendment. I reported my entire state refund as taxable even though I was already over the SALT cap from property taxes alone! My tax guy said that was a common mistake. Check your 2020 Schedule A and see if line 5d (state and local income taxes) was actually included in your Schedule A line 5e total. If you hit the SALT cap with property taxes already, the state income tax deduction effectively gave you zero benefit, so the refund shouldn't be taxable.

This is such a confusing area! I went through the same thing last year and it took me forever to figure out. Here's what I learned from working through the IRS worksheet: The key is understanding that you only pay tax on refunds where you actually got a federal tax benefit from the original deduction. With the SALT cap, this gets tricky because you might have paid more in state/local taxes than you could actually deduct. For your situation with $28,500 itemized vs $25,100 standard (so $3,400 benefit), you need to look at HOW you got to that $10k SALT deduction. If your property taxes were say $7k and state income taxes were $5k, then you got the full benefit from both. Your $1,200 refund would likely be fully taxable since it's less than your $3,400 total benefit. But if your property taxes alone were $10k or more, then you got zero federal benefit from your state income tax payments, making the refund non-taxable. The IRS Publication 525 worksheet walks through this step by step, but honestly it's pretty confusing even with the examples. The main thing is figuring out what portion of your state taxes actually reduced your federal tax bill.

This thread has been incredibly helpful! I was in a similar situation and was completely overthinking this. I had $9,500 in property taxes and $3,200 in state income taxes last year, so I was right at the $10,000 SALT cap with $2,700 of my state income taxes actually being deductible. When I got a $800 state tax refund this year, I initially panicked thinking the whole amount was taxable. But after reading through all these explanations, I realized that since only $2,700 of my state income taxes provided a federal benefit, and my refund was less than that amount, the full $800 refund is taxable income. The key insight for me was understanding that it's not about whether you hit the SALT cap or not - it's about which specific taxes within that cap actually gave you a federal deduction. In my case, both my property taxes AND a portion of my state income taxes fit under the $10k limit, so getting a refund on those state income taxes does create taxable income. Thanks everyone for breaking this down so clearly! The IRS worksheet suddenly makes a lot more sense now.

This is such a helpful discussion! I was completely confused about this same issue until I worked through it step by step. For Emma's original question with $28,500 itemized vs $25,100 standard deduction - the $1,200 state refund taxability really depends on the breakdown of that SALT deduction. If you can find your prior year Schedule A (line 5a for state income taxes and line 5b for property taxes), that will show you exactly what went into your $10k SALT cap. The formula is basically: Look at how much of your state income taxes actually fit under the SALT cap after accounting for property taxes. That's the maximum amount of any state refund that could be taxable. Then compare that to your overall itemized vs standard deduction benefit to see if you actually got a federal tax advantage. One thing I learned the hard way - keep good records of what types of state/local taxes you paid because you'll need those details when refunds come in the following year. The IRS forms don't always make it obvious how to trace this back, especially when you're dealing with estimated payments, withholding, and property tax installments all mixing together. It's definitely worth getting this right because the difference between reporting the full refund as taxable versus the correct partial amount can be significant on your tax bill!