If a state refund goes to satisfy past-due tax, is it still taxable income?
A state refund is taxable if it was deducted in a prior year.
For example, if you had a 2017 state refund and it was garnished to pay a 2015 liability, then the 2017 refund would be taxable in 2018 if you itemized in 2017 and received a tax benefit for the deduction of the taxes. For 2018, which is the year in which your refund was applied to a prior year liability, you would have a deduction for the same amount as you would have technically made a payment in 2018.
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Answered by: Mark B. Zinman, CPA, is a managing partner with Zinman & Company in Southampton, Pa.