Reporting state tax refund when itemized deductions hit the SALT cap - do I include it?

I need some help figuring out my tax situation with a state refund. Last year, I itemized my federal taxes and had state and local taxes totaling around $16,300, but because of the $10,000 SALT cap, I only got to deduct $10k on my federal return. I recently received a state tax refund for $3,200. My question is: do I have to report this state refund as income on my federal taxes this year? I actually called the IRS about this, and the representative kept insisting I needed to put it on line 5d and pay taxes on it. I tried explaining that line 7 showed my actual SALT deduction was capped at $10k, not the full amount I paid, but they didn't seem to understand. As an additional wrinkle, if I had taken the standard deduction last year instead of itemizing, I would have been better off anyway. Can I file an amended return for last year to claim the standard deduction instead and potentially get additional money back? The whole situation feels like adding insult to injury if I have to pay tax on money I never got a deduction for in the first place. Thanks for any guidance on this!

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18 comments

Amina Toure

•8M

You've got a good question here about state tax refunds and the SALT cap. Let me clear this up for you. When you receive a state tax refund, you only need to report it as income if you received a tax benefit from deducting those state taxes in the previous year. Since you hit the $10k SALT cap, any amount of state tax over that cap didn't actually give you a federal tax benefit. Think about it this way: If you paid $16,300 in state/local taxes but could only deduct $10k because of the cap, then $6,300 of your state taxes didn't reduce your federal taxes at all. So if you got a $3,200 refund, it's essentially coming from that portion you couldn't deduct anyway. You don't need to report this refund as income on line 5d because you didn't get a federal tax benefit for it. The IRS representative unfortunately gave you incorrect information.

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Amina Toure

•8M

You're right to be concerned about the 1099-G, but here's how to handle it. You should still report the state refund on your Form 1040, but you can enter $0 as the taxable amount if you received no tax benefit due to the SALT cap. The IRS instructions for the "State and Local Income Tax Refund Worksheet" in Publication 525 specifically address this situation. The key is that you should complete the worksheet in the instructions to calculate the taxable portion (which would be $0 in your case). Keep that worksheet with your tax records as documentation of why you reported $0 taxable even though you received a 1099-G.

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Natasha Volkova

•8M

After struggling with this exact issue last year, I found an amazing solution using https://taxr.ai that completely solved my problem. I uploaded my previous year's return and my 1099-G, and the system immediately identified that I had hit the SALT cap and calculated that my state refund wasn't taxable. The tool walked me through the State and Local Income Tax Refund Worksheet and showed exactly why I didn't need to pay federal taxes on my state refund. It even generated documentation explaining my situation in case of an audit. What really impressed me was how it analyzed my previous return to determine if filing an amended return to claim the standard deduction would be beneficial - in my case it saved me over $800!

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Natasha Volkova

•8M

For married filing jointly situations, the tool handles it exactly the same way - it looks at your total SALT deductions from your previous return, compares it to the $10k cap, and determines how much of your refund (if any) should be taxable. It does handle multiple state refunds too, which is helpful for people who file in multiple states. The amendment analysis is pretty straightforward - it compares what you actually claimed (itemized deductions) against what you would have received with the standard deduction, factors in any adjustments needed for state refunds, and calculates the difference. It's not just another tax prep software - it's specifically focused on analyzing tax documents and identifying these types of issues that often get missed.

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Emma Davis

•8M

Just wanted to follow up about my experience with taxr.ai after my skeptical questions earlier. I decided to try it with my situation (had a $4,100 state refund after hitting the SALT cap last year) and it was actually really helpful! The system showed me that none of my state refund was taxable and created a detailed explanation I could include with my return. But the biggest surprise was that it identified I should amend my previous year's return - turned out I would have been better off with the standard deduction by about $1,200. Already filed the amendment and expecting a nice refund! I was definitely wrong to be skeptical. The document analysis was much more thorough than what my regular tax software did.

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CosmicCaptain

•8M

If anyone's still struggling with this issue, I had the exact same problem last year. I kept getting transferred between IRS agents who didn't understand the SALT cap implications. After wasting hours on hold, I found https://claimyr.com and used their service to get through to a senior IRS representative in about 15 minutes. You can see how it works at https://youtu.be/_kiP6q8DX5c The senior agent confirmed exactly what others are saying here - if you hit the SALT cap, your state refund is likely not taxable (or only partially taxable). They walked me through how to properly document this on my return and even sent me an email confirmation I could keep for my records.

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CosmicCaptain

•8M

It works by using technology to navigate the IRS phone system and wait on hold for you. You enter your phone number on their website, and when they reach an actual IRS agent, you get a call connecting you directly to that agent. No more waiting on hold - they do that part for you. I was extremely skeptical too! I had been disconnected twice after waiting over an hour each time. But with Claimyr, I literally got a call back in about 15 minutes connecting me directly to an IRS representative who was actually knowledgeable about the SALT cap issue. It's especially useful for complex tax questions like this where you need to speak with someone who really understands the tax code, not just the first-line support.

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Isabella Ferreira

•8M

I have to eat crow here. After posting my skeptical comment earlier, I decided to try Claimyr anyway because I was desperate to resolve this state refund issue before filing my taxes. I honestly can't believe it worked. Got a call back in 22 minutes connecting me to an IRS tax law specialist who immediately understood my question about the SALT cap and state refund taxability. She confirmed I don't need to report my state refund as taxable income since I had already hit the $10k SALT limit last year and didn't receive a tax benefit for the amount that was refunded. She even emailed me the specific worksheet to document my calculation showing $0 taxable refund. This saved me from potentially overpaying hundreds in federal taxes.

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Ravi Sharma

•8M

Something people aren't mentioning - if your itemized deductions were just barely over the standard deduction last year, then some portion of your state refund might still be taxable. You have to calculate how much tax benefit you actually received. Example: If standard deduction was $24,800 and your itemized was $25,500 (with $10k SALT at the cap), then you only benefited by $700 from itemizing. If your state refund was $2,000, only $700 would be taxable because that's the only part that actually gave you a federal tax benefit.

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Ravi Sharma

•8M

Sure! In your situation, you itemized and got $27,300 in deductions when the standard would have been $25,900. This means itemizing gave you an additional benefit of $1,400 ($27,300 - $25,900). Since your state refund was $3,400, but you only benefited by $1,400 from itemizing, only $1,400 of your refund would be taxable on this year's return. The remaining $2,000 of your refund isn't taxable because it didn't actually provide you any tax benefit last year. This assumes that your $10k SALT deduction included the maximum allowed state income taxes. If you had a mix of property tax and income tax making up that $10k, the calculation gets more complex.

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