Why do I have to pay federal taxes on last year's state tax refund?

Wait so if I always take the standard deduction (never itemize), I don't need to report my state tax refund as income? I've been reporting mine for years and didn't know this!

That's correct! If you take the standard deduction, your state tax refund is not taxable federal income. You never claimed a deduction for state taxes paid, so there's no benefit to "pay back" when you get a refund. If you've been unnecessarily reporting your state refunds as income while taking the standard deduction, you might want to consider filing amended returns for the previous three tax years to get that money back. But check with a tax professional to make sure it's worth the effort given your specific situation.

Does it actually explain WHY certain things are taxable? Or does it just tell you if something is or isn't? Because I want to understand the logic, not just be told what to do.

How long does the analysis take? I have a stack of tax documents and I'm trying to figure this out before the deadline next month. Is it instant or do you have to wait?

It absolutely explains the "why" behind tax situations. When I uploaded my documents, it didn't just tell me my state refund wasn't taxable - it explained the whole concept of "tax benefit rule" and how it only applies when you've itemized deductions. The explanations are conversational and actually helped me understand the logic. The analysis happens pretty quickly - I got my results in minutes, not hours. I had about 15 documents including W-2s, 1099s, and mortgage statements, and it processed everything fast. You can upload all your documents at once and get a comprehensive analysis.

How does this actually work? Sounds kinda sketchy that they can somehow get you through when calling normally means hours on hold. Are they just paying people at the IRS or something?

I don't believe this for a second. There's no way to "skip the line" with the IRS. They're notoriously understaffed and everyone has to wait. This sounds like a scam to get your personal info or money.

It's not sketchy at all - they use a technology that monitors the IRS hold queue and calls you back when an agent is available. No special treatment or line-skipping, just automating the hold process so you don't have to sit with a phone to your ear for hours. I was skeptical too! They don't have "inside connections" at the IRS - they simply have software that does the waiting for you. They can't see your personal tax info or anything like that. They just connect the call when a representative is available and then drop off the line. It's the same as if you called yourself, except you don't waste half your day listening to the same hold music over and over.

Yes, TurboTax will ask if you itemized last year and will calculate the taxable portion of your state refund correctly. It actually imports your previous year's info if you used TurboTax last year too, so it knows automatically. I've been using it for years and it handles this situation well.

Thank you for confirming! That's a relief. I wasn't sure if it would automatically know or if I needed to figure it out myself. I'll just make sure I have last year's return handy when I do my taxes this weekend.

This worksheet is so confusing though!! I tried to use it and got completely lost. Does anyone know if there's a simpler explanation somewhere?

I agree the worksheet is pretty confusing. The basic idea is that you're only taxed on the portion of your refund that actually gave you a tax benefit in the previous year. If your itemized deductions were just barely more than the standard deduction, then only a portion of your state tax deduction actually benefited you, so only part of the refund is taxable. But if your itemized deductions exceeded the standard deduction by more than your state tax payments, then the whole refund would be taxable.