If you got a state or local tax refund in 2025, part or all of it may be taxable on your 2025 federal return — but only if the earlier deduction gave you a tax benefit. This guide explains when a prior-year refund is taxable, when it is not, and where it goes on Schedule 1 (Form 1040) for the 2026 filing season. It is written for individual taxpayers, including people who itemized in a prior year and taxpayers who filed in more than one state.
Quick takeaways
- A state or local income tax refund is generally taxable only if you deducted the tax in an earlier year and got a tax benefit from that deduction.
- If you did not itemize in the earlier year, or you elected to deduct state and local general sales taxes instead of state and local income taxes, the refund is generally not taxable on your federal return.
- For the 2025 tax year, taxable state or local income tax refunds go on Schedule 1 (Form 1040), line 1; other recovered itemized deductions generally go on Schedule 1, line 8z.
- If part of your 2025 refund was credited to 2025 estimated state or local income tax, the IRS treats that amount as received in 2025.
- If the state refund is tied to a different tax year, or it is a sales tax or property tax refund, the IRS says to use the broader recovery rules in Publication 525 instead of the simple worksheet in the Form 1040 instructions.
Who this applies to
This article applies to individual taxpayers, especially people who claimed itemized deductions in a prior year, received a Form 1099-G, or live in more than one state during the year. It is a federal reporting guide; your state return may use different rules and forms, so check your state department of revenue if you also need to report the refund on a state return.
Introduction
A lot of taxpayers think every state refund is tax-free. That is not how the federal rule works. The IRS uses the tax benefit rule, which means a recovery is taxable only to the extent the earlier deduction actually reduced your tax. In plain English: if you got a tax break from deducting the original payment, a later refund may have to come back as income.
For tax year 2025, you generally report taxable state refunds on the return you file in 2026. The IRS says state or local income tax refunds, credits, and offsets received in 2025 may be taxable, and the payer should generally send Form 1099-G by January 31, 2026. If you did not receive the form, you still may need to report the taxable refund.
What makes a state refund taxable
The IRS treats a state refund as a recovery — that is, a return of something you deducted or credited in an earlier year. Recoveries are taxable only when the earlier deduction gave you a tax benefit. If the deduction did not reduce your tax, the recovery is generally not taxable.
That rule matters most for people who itemized deductions in the earlier year. For example, if you deducted state and local income taxes on Schedule A (Form 1040) in 2024 and then got a refund in 2025, some or all of that refund may be taxable in 2025. If you used the standard deduction in 2024, the refund is generally not taxable because you did not get a federal deduction for those state taxes.
When a state refund is taxable
Usually taxable
A state or local income tax refund, credit, or offset is generally taxable if all of these are true:
- You paid the tax in an earlier year.
- You deducted it on a prior-year federal return.
- That deduction reduced your federal tax.
The IRS instructions for 2025 say that if you received a refund, credit, or offset of state or local income taxes in 2025, you may have to report it. If the refund was for a tax you paid in 2024 and you deducted state and local income taxes on your 2024 Schedule A, use the State and Local Income Tax Refund Worksheet in the 2025 Form 1040 instructions to see whether any part is taxable.
Usually not taxable
None of your refund is taxable if, in the year you paid the tax, you either:
- didn’t itemize deductions, or
- elected to deduct state and local general sales taxes instead of state and local income taxes.
That means a taxpayer who used the standard deduction in the earlier year usually does not report the state refund as income on the federal return. Likewise, if you chose sales tax instead of income tax on Schedule A, the income tax refund is generally not taxable.
When the simple worksheet does not apply
The 2025 Form 1040 instructions say to use Publication 525 instead of the simple worksheet if any of these apply:
- the refund is for a tax year other than 2024,
- the refund is not an income tax refund, such as a general sales tax or real property tax refund,
- you had certain AMT, credit, or dependency situations, or
- you received a refund because of a jointly filed state or local return but are not filing a joint 2025 federal return with the same person.
How to report the refund on your 2025 federal return
Where it goes
For the 2025 return, the IRS says to report a taxable state or local income tax refund on Schedule 1 (Form 1040), line 1. If you also have other recoveries — for example, a mortgage interest refund or another itemized deduction recovery — report the state refund on line 1 and the other recoveries on Schedule 1, line 8z.
What if you got a 1099-G?
The IRS says the state or local agency should generally send Form 1099-G to you by January 31, 2026 for a 2025 refund. If you did not get the form, check with the agency that made the payment. The IRS also says to report a taxable refund even if you never receive Form 1099-G.
What if the refund was credited to next year’s state estimate?
If you chose to apply part or all of the refund to your 2025 estimated state or local income tax, the IRS treats the credited amount as received in 2025. That usually means it belongs on your 2025 federal return if it is otherwise taxable under the recovery rules.
What if you have more than one recovery?
If you have both a state refund and other recovered itemized deductions, Publication 525 says you may need to allocate the taxable amount between Schedule 1, line 1 and line 8z. The allocation method depends on the mix of recoveries and whether part of the earlier deduction gave you a tax benefit. Keep the worksheet or calculation with your records if your numbers differ from the Form 1099-G amount.
Why multi-state filers need extra care
If you lived in more than one state, or if you filed a joint state return but a separate federal return, the refund may not fit the simple worksheet. The IRS instructions send you to Publication 525 for refunds from a tax year other than 2024, for non-income-tax refunds, and for refunds tied to a jointly filed state return when your federal filing status is different.
That does not automatically make the refund taxable. It means you may need the broader itemized deduction recoveries rules, which look at how much of the earlier deduction actually reduced your tax and how to split the taxable amount among different recoveries.
Common mistakes to avoid
Myth: Every state tax refund is taxable. Fact: A refund is taxable only to the extent the original deduction gave you a tax benefit. If you did not itemize, or you deducted sales tax instead of income tax, the refund is generally not taxable.
Other common mistakes include:
- reporting only the Form 1099-G amount without checking the worksheet or tax benefit rule,
- using the wrong year’s worksheet,
- forgetting that a refund credited to next year’s estimate is treated as received in the current year, and
- missing the special rules for sales tax, real property tax, or jointly filed state returns.
Practical examples
Example 1: prior-year itemizer with a taxable refund
In 2024, you filed a joint return with $30,700 of itemized deductions and a $29,200 standard deduction, so your itemized deductions exceeded the standard deduction by $1,500. In 2025, you received $400 of state and local income tax refund and $525 of other recovered itemized deductions. Because your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction, the IRS example says to include the recoveries in 2025 income; the state refund goes on Schedule 1, line 1, and the other recoveries go on line 8z. Simplified illustration only.
Example 2: standard deduction year, no taxable refund
In 2024, you took the standard deduction and did not itemize. In 2025, your state sends you a $900 refund for 2024 state income taxes. Because you did not deduct those taxes on your federal return, the refund is generally not taxable on your 2025 federal return. Simplified illustration only.
Example 3: refund credited to next year’s estimate
In 2025, your state gives you a $1,200 refund, and you ask the state to apply it to your 2025 estimated tax. The IRS treats the credited amount as received in 2025, so it is considered in the 2025 tax year for federal reporting if the refund is otherwise taxable. Simplified illustration only.
Checklist: how to decide whether your state refund is taxable
| Situation | Federal result for 2025 | Where to report | Source |
|---|---|---|---|
| You did not itemize in the prior year | Usually not taxable | No federal reporting needed | |
| You deducted state and local income taxes in the prior year and got a tax benefit | Usually taxable to the extent of the tax benefit | Schedule 1 (Form 1040), line 1 | |
| You chose to deduct general sales taxes instead of income taxes | Usually not taxable | No federal reporting for the refund itself | |
| The refund is for sales tax, property tax, or another itemized deduction recovery | Use Publication 525 recovery rules | Usually Schedule 1, line 8z, with allocation if needed | |
| The refund was applied to 2025 estimated state tax | Treated as received in 2025 | Report in 2025 if taxable | |
| The refund came from a joint state return but you are not filing a joint federal return with that person | Use the exception and broader recovery rules | Usually Publication 525 / worksheet |
FAQ
Is a state refund always taxable on my federal return?
No. The IRS says it is taxable only if the earlier deduction actually gave you a tax benefit. If you did not itemize, or if you elected to deduct sales tax instead of income tax, the refund is generally not taxable.
Where do I report a taxable state income tax refund for 2025?
The IRS says to report it on Schedule 1 (Form 1040), line 1. If you also have other recoveries, report those on line 8z.
What if I never got Form 1099-G?
Check with the state or local agency that issued the refund. The IRS says you still must report the taxable amount even if you do not receive Form 1099-G.
What if my refund was from a joint state return but I file separate federal returns now?
The 2025 Form 1040 instructions say this is one of the situations where you should use Publication 525 instead of the simple worksheet. The federal reporting can depend on how much of the earlier deduction actually reduced your tax and how the refund should be allocated.
Do sales tax or property tax refunds follow the same rule?
Not always. The IRS says refunds other than income tax refunds — such as general sales tax or real property tax refunds — generally fall under Publication 525 rather than the simple state income tax refund worksheet.
If my refund was credited to next year’s taxes, do I report it now or next year?
Report it in the year the credit is treated as received. For a 2025 credit applied to 2025 estimated state tax, the IRS says the amount is treated as received in 2025.
Bottom line
A state tax refund is taxable on your federal return only if you got a tax benefit from the earlier deduction. For many prior-year itemizers, that means some or all of a 2025 state refund goes on Schedule 1 (Form 1040), line 1. If the refund is tied to sales tax, property tax, more than one tax year, or a joint state return with a different federal filing status, the IRS tells you to use the broader recovery rules in Publication 525.
What to do next
- Pull your 2024 Schedule A and compare it with the 2025 refund you received.
- Check whether you itemized in the earlier year and whether the deduction reduced your federal tax.
- Use the 2025 State and Local Income Tax Refund Worksheet if the refund is a simple 2024 state income tax refund.
- If the refund is for sales tax, property tax, another year, or a joint state return with a different federal filing status, use Publication 525 instead.
- If the numbers are complicated, keep the worksheet and 1099-G with your records and have a CPA, EA, or tax attorney review the return before filing.
Source note: Sources consulted: IRS forms, instructions, publications, official updates, and related guidance.
