1) Q: I received a state tax refund but I took a standard deduction the previous year. Will I be taxed on this income?

A: Generally speaking you should be taxed on any state tax refund you receive because you did not pay taxes on that income the previous year. The situation you mentioned, however, is an exception. Due to the fact that the standard deduction was used, in actuality you did pay taxes even on the state taxes paid the previous year.

Example: A taxpayer overpays $500 California state taxes in 2004. In that year he takes the standard deduction so the $500 of state taxes he has overpaid has no effect on the 2004 federal taxes due. In 2005 the taxpayer receives a check for $500 from the state of California. The taxpayer will not be taxed on this refund because he did not get a tax benefit from this payment.

2) Q: I received a state tax refund but the previous year I was subject to the Alternative Minimum Tax (AMT). Will I be taxed on this income?

A: Generally speaking you should be taxed on any state tax refund you receive because state taxes you paid reduced federal taxes the previous year. The situation you mentioned, however, may be an exception because AMT may have eliminated some or all of the federal tax benefit of having paid state taxes.

Example: A taxpayer overpays $500 of California state taxes in 2004. In that year the AMT tax eradicated the entire tax benefit of the state taxes he paid. In 2005 the taxpayer receives a check for $500 from the state of California. The taxpayer will not be taxed on this amount because he did not get a tax reduction because of it in the previous year.

3) Q: I received a state tax refund on taxes I paid to the state several years ago. Will I be taxed on this income?

A: The rule is that you will be taxed on the state tax refund as long as you had a tax benefit from it the year it was paid. You need to look at the situation the year the state tax was paid and figure out if you received a tax benefit.

Example: On January 2005 A taxpayer receives a $700 state tax refund on money paid in on his 2002 tax return. The taxpayer's 2002 federal taxes were lowered because of the state taxes he paid in so on his 2005 tax return the $700 refund will be taxable.

4) Q: I received a state tax refund from many states. Will I be taxed on this income?

A: You will be taxed on the state tax refund as long as you had a tax benefit from it the year it was paid. You need to look at the situation in the state the tax was paid and figure out if you received a tax benefit.

Example: During 2005 a taxpayer receives a $700 California state tax refund, $200 New York state refund, and a $75 Oregon state tax refund. The taxpayer's taxes were lowered the previous year because of the state taxes he paid in so on his 2005 tax return all of the refunded amounts will be taxable.