State and local tax refunds: If you’re wondering why this is listed under income, it’s because the IRS may consider your state and local refund taxable if you got a state and local income tax deduction on last year’s federal return.
State and local income tax refunds may be taxable in the year you received them if all of the following occurred:
– You got an itemized deduction for state and local income tax in the prior year.
– You received a benefit from taking the deduction. For example, the deduction increased your federal refund or reduced your tax liability.
– You received a state or local refund, even if you didn’t receive a 1099-G.
Your state and local income tax refunds are not taxable if any of the following apply:
– You took the standard deduction in the prior year (you did not itemize your deductions).
– You had negative taxable income (your deductions exceeded your adjusted gross income).
– You itemized deductions, and elected to deduct state and local general sales tax instead of state and local income taxes.
What paperwork do I need?
 – Form 1099-G
– Prior year state tax returns
More Information
 – IRS Publication 525 – Taxable and Nontaxable Income
– IRS Publication 17 – Chapter 12, Other Income