Tax Free

• According to the IRS, your state tax refund is not taxable if you declined to itemize your deductions on Schedule A for the same year you received the refund. If you itemized but opted to use the state and local general sales taxes instead of state and local income tax, your state refund is also exempt from federal income tax.
  
  

Form 1099-G

• If you received a refund or credit to apply to a future tax bill for state or local taxes, you may receive a 1099-G form for "certain government payments."
  
  

Taxable

• If you itemized deductions and subsequently received a state or local tax refund, that refund may be taxable. If so, you'll enter the taxable amount on Form 1040, Line 10 as income.
  
  

Worksheet

• The IRS provides a special worksheet to determine if any of your state or local refund is taxable. For tax year 2009, this worksheet can be found on page 23 of the 1040 instruction booklet (See Resources).
  
  

Publication 525

• You may be required to review Publication 525 (see Resources) to determine the taxability of your state refund if certain conditions apply. For example, refer to Publication 525 if your refund is for a tax year other than the one previous to receiving it or if the refund is for a tax other than income tax.