What should taxpayers who itemized deductions do if they receive a state or local tax refund?

Taxpayers who itemized deductions and receive a state or local tax refund must determine the taxable amount of that refund using a worksheet. This is important because refunds of state or local taxes can potentially be taxable if the taxpayer received a tax benefit from those deductions in the prior year.

When individuals itemize deductions, they may have benefited from deducting state and local taxes, which effectively reduces their taxable income. If they later receive a refund for those taxes, they need to assess whether that refund influenced their previous year’s tax bill. The worksheet helps calculate the portion of the refund that may need to be included in taxable income based on the amount deducted earlier and the total state and local taxes paid.

This approach ensures that taxpayers correctly report their income and comply with tax regulations. It recognizes that not all refunds are taxable, especially if the taxpayer did not receive a benefit from the deduction due to other factors, such as exceeding the standard deduction.