Taxable Refunds, Credits, or Offsets of State and Local Income Taxes
If you received a refund, credit, or offset of state or local income taxes in 2017, you may be required to report this amount as income on your tax return.
The new tax law didn’t change the treatment of taxable refunds, credits, or offsets of state and local income taxes.
If you received a refund, credit, or offset from either state or local income taxes, you must include that amount as income if you deducted the tax in an earlier year.
Exception: You won’t be taxed on the refund, credit, or offset if you didn’t itemize deductions or elected to deduct state and local general sales taxes instead of state and local income taxes. For more information, see IRS Publication 525 or IRS Form 1040 Instructions – Line 10.
The government agency which provided you with the benefit should have provided you with an IRS Form 1099-G, Certain Government Payments, with Box 2 listing the amount of the benefit.
The new tax law didn’t change the treatment of taxable refunds, credits, or offsets of state and local income taxes.
How will this affect me?
In 2017, Yang overpaid his state income taxes. Yang receives a refund check from the state of Maryland in 2018. Yang itemized deductions and didn’t elect to deduct state and local general sales taxes instead of state and local income taxes. Yang will be taxed on the amount refunded in the 2018 tax year.
In 2017, Yang overpaid his state income taxes. Yang chose to apply the overpaid amount of his 2017 taxes to his 2018 state income tax liability. Yang itemized deductions and didn’t elect to deduct state and local general sales taxes instead of state and local income taxes. Yang will be taxed on the amount credited in the 2018 tax year.