To find out how the taxable portion of state and local refunds is calculated:
- Go to Screen 14.2, State Tax Refunds, Unemployment Comp.
- Click on the State Refund Wksht in the left-hand navigation panel.
- Mark the Itemized in prior year box.
- If this box has not been checked, state income taxes gave no tax benefit in the prior year; therefore the entire state tax refund is nontaxable
- Additional entries on this screen are required to calculate the taxable portion of the state tax refund. See calculation below.
The worksheet is calculated as follows:
| Line | Instruction | Input Field Name on Screen 14.2 or [Calculation] |
| 1 | State and local income tax refunds (prior year) | Income tax refunds, credits or offsets (2) |
| 2 | Refunds attributable to post 12/31/20XX payments per IRS Pub. 525 | Refunds attributable to post-20XX ES/extension payments |
| 3 | Net state and local income tax refunds | [Add lines 1 and 2] |
| 4 | State and local taxes paid from prior year Schedule A, line 5 | State and local income taxes paid |
| 5 | Prior year allowable sales tax deduction | Allowed or allowable general sales tax deduction |
| 6 | Excess of income taxes deducted over sales taxes deducted | State and local income taxes paid less Allowed or allowable general sales tax deduction |
| 7 | Enter the smaller of line 3 or line 6 | [Smaller of line 3 or line 6] |
| 8 | Itemized deductions from prior year Schedule A, line 29 | Itemized deductions from Schedule A, line 29 |
| 9 | Prior year recomputed itemized deductions (if phase out) | |
| 10 | Prior year base standard deduction | Base Standard Deduction |
| 11 | Prior year add'l standard deduction for age/blindness | Number of age/blind exemptions |
| 12 | Prior year disaster loss / new motor vehicle deduction | New motor vehicle tax deduction |
| 13 | Prior year total standard deduction | [Add lines 10, 11, and 12] |
| 14 | Enter the larger of line 9 or line 13 | [Larger of line 9 or line 13] |
| 15 | Subtract line 14 from line 8 (not less than 0) | [Line 8 minus Line 14] |
| 16 | Enter the smaller of line 7 or line 15 | [Smaller of line 7 or line 15] |
| 17 | Negative taxable income (prior year) | |
| 18 | Refund with no tax benefit due to AMT or non refundable credits | Refund with not tax benefit due to AMT, non refundable credits, or 0% capital gain or qualified dividend rate |
| 19 | State and local refunds taxable this year | [Add lines 16, 17, and 18] |
You cannot force the State Refund Worksheet to generate if the State Refund is nontaxable.
For more information, please review the IRS instructions for Form 1040, namely page 85.
