Tax Refunds On 1099-G: Taxable Or Not?

Among the various tax forms I have been receiving lately is a 1099-G from my state. It says it’s for the state income tax refund I received last year.

I received a state income tax refund last year because I had too much withheld in the previous year. The refund was returning my own money back to me.

A refund isn’t income. If I return something to a store, the store doesn’t issue a 1099 to me for the refund. Why does the state issue a 1099 to me for the tax refund? Am I going to be taxed on a return of my own money?

Not Automatically Taxed

Just because you get a 1099 doesn’t mean you will automatically pay tax on it. The instructions on the form say

"It may be taxable to you if you deducted the state or local income tax paid on Schedule A (Form 1040)."

When it says it "may be taxable" with a conditional "if" it means the tax refund dollars in box 2 on the 1099-G are NOT taxable if you didn’t deduct it on your federal income tax return. And even if you did deduct, it still may not be taxable.

Taxable If You Over-Deducted

When you deduct state income tax on your federal return, you are deducting the withheld amount, not the actual amount you end up paying. Therefore if you get a refund from the state, it means you deducted too much in the previous year. That’s why you may have to add back the refund as income in the following year, even though a tax refund isn’t really income. The 1099-G is compensating for the over-deduction in the previous year.

Re-Do Your Taxes

However, just because you over-deducted, it doesn’t mean you actually benefited from the over-deduction. If you didn’t deduct as much as you did, maybe you would’ve used the standard deduction. There are limits to itemized deductions at some income levels. AMT also excludes state income tax from the deductions.

You are supposed to re-do your previous year’s taxes with the actual amount of the state income tax you should’ve paid and see how much you really benefited from the over-deduction.

If your state income tax refund is $2,000 and you benefited from all of it, you include $2,000 as income in the following year. If you only benefited from $1,000 of it, you include $1,000 as income in the following year. If you didn’t benefit from the over-deduction at all because you were on AMT, you don’t include anything from the tax refund.

Re-doing the previous year’s taxes just because of a state income tax refund is a big headache if you do your taxes by pencil and paper. If you use software, you hope the software will take care of it. If you use a CPA, the CPA may charge you extra for the extra work. The best way would be slightly under-pay your state each year but still stay away from any underpayment penalty; that’s not so easy to manage.

Unemployment Income Is Taxable

1099-G is also used for reporting unemployment income from the state. That number is reported in Box 1 on the form. Unemployment income is taxable.

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  1. Make Money Make Cents says

    I received a 1099-G for the last two years. I dont believe that I had to actually pay taxes on it. I guess I will find out when I do my taxes next week!

  2. ajk says

    The worst thing you can do is make a estimated state payment in January and then get a refund. Some of that refund came from payments made the previous year which you deducted on your federal return, but part of the refund is from your January payment that you haven’t deducted yet. As a result, you have to apportion your refund between the two tax years and then do the benefit calculation. Rinse and repeat the year after.

  3. Nina says

    I agree ajk. That’s why I started making all my estimated payments for January in December. It was too much for my tiny brain.

  4. Kelli says

    I received a 1099-G for the state I live in. I had to work approximately 10 days in NY which my employer did not take any NY taxes out. When I did my taxes, I ended up with a refund overall. My question is…since I paid in NY but I received 1099-G for the state I live in, can I net the difference as income on my federal return.

  5. Harry Sit says

    Kelli – No. The tax you paid to NY may be deductible though (if you itemize and you are not subject to AMT).

  6. Mike says

    I live in California and itemize my California taxes. I sold my Hawaii timeshare and 720 dollars was taken out for withholding and paid to the State of Hawaii. I received a the 720 dollars back after submitting paperwork to Hawaii that the sale was a capital loss. I received a 1099G from Hawaii for the 720 dollars. Do I need to report the 1099G as income on my Federal tax and if so where?

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