Is State Tax Refund Taxable?

I filed 1040NREZ (Non Resident) for 99. NR have to itemnize. I made a mistake when doing that. When calculating the state tax deduction I reduced the
state tax withhold amount to the actual state tax I paid after the refund. This year I am filing 1040. Do I need to report the state tax refund as income?

yes. state and local refunds are income even on the federal level.

Won't I be double taxed on that money?

not really. the refund that you received was a function of your wages, which are taxed. The refund is the excess in TAXES that you paid. So, the reason why it is taxable is because that money really was never taxed as income--it was taxes. It is a very confusing concept.

But I didn't deduct it last year!!! Last year I deducted the actual state tax I paid instead of the state tax withhold. So the refund was already taxed by the federal last year.

it sounds like what you need to do is file an amended return, both federal and state and local if you have one. This will correct your return. And then just file 2000 normally. Also, I am a little confused because the state tax withheld(on your W2) is equal to the amount of state tax you paid, unless you made other payments. On your W2 you will see State, local, federal, social security, medicare taxes withheld. When it says withheld, that means that it was deducted from your paycheck and paid to those agencies for you.

Usually, each return is "audited" for correctness according to the material that was filed with it (W2s and 1099s). Probably, you did calculate your return correctly and just are confused by the wording. At least that's what it sounds like. Did you get info from your state showing that you calculated incorrectly. If so then file an amended return for 1999 and correct it. If I were you I would call your state tax agency and ask them. They can usualy pull up your file on a computer and go over it with you right then.

Maybe have a friend look over it with you so that someone has the numbers and data right there in front of them. It is hard for me to tell you if/what you did incorrectly if I don't see the actual documents.

Good luck!!

Thanks Wowie. I just finished a 1040X this afternoon.
I made the mistake for my federal 1999. When I deducted my state tax I should have used the sum of state income tax withhold and California state disability insurance. But what I used was my total state tax which was the withhold subtracted by the amount of refund I was expecting which I actually got this year.


[Edited by Yunsheng on 02-11-2001 at 01:57 AM]