My accountant says my state income tax refund from last year is taxable. Is this possible? H.C., Middlesex, N.J.
Yes. If you claimed state income taxes as an itemized deduction on Schedule A of your 2015 Form 1040, any refund you received in 2016 from the state counts as taxable income on your 2016 return. In essence, you can’t have things both ways if you deducted the full amount that you paid. However, in other cases, the refund isn’t taxable. For instance, this rule doesn’t apply if you deducted state sales taxes instead of income taxes on your 2015 return.
Tip: There’s no tax on a refund received for a year for which you claimed the standard deduction.
Small Business Tax Strategies Vol. 12 No. 4 April 2017