The State refund for 2006 would likely have been received in 2007, and IF you itemized and deducted State Income taxes in 2006 and they earned you a State refund later, well, the IRS wants the 2006 deduction you took that refunded back as income and so you have to report it as income in 2007 IF, and ONLY IF you itemized your deductions in 2006. If you took the standard deduction in 2006, then you DO NOT need to declared the State Income Tax refund.

In either Case, a Federal Refund does NOT need to be declared as income whether you itemize or not.

-Marc
Per Diem Reports

Been there, done that one too!
I was out for 9 months and receive a benefit check from a personal disability policy. It paid me as long as I did not perform my job in any way (Driving) and I did not have to claim it on my taxes. Now, they are deducting SS out of it, but you do not claim the benefit.........just my 2 miles worth.....KK

Here is what the law says on Disability Benefits:
Benefits received under an Insurance contract indemnifying an individual against income lost by reason of loss of use of his body or a portion of his body are tax exempt, as are payments under an income replacement policy in the event of illness. However, amounts received under a policy designed to business overhead costs in the case of prolonged disability are taxable. A lump-sum payment received under an employer-employee contributory disability insurance policy and paid with reference to a permanently disabling illness is excludable to the extent that it is attributable to the employees contributions. As to excludability of amounts attributable to employer's contributions, those are taxable to the employee if the the premium benefit was not taxed as income.


So if you paid all of the premiums, you are exempt from tax.


-Marc
Per Diem Calculator

Actually, I believe this needs a bit of clarification. If you do your state tax return and for example find that your state tax due is say $1000 for the year and you had $1500 withheld during the year, you would have a refund of $500. Now, if you itemized your Federal return and deducted $1000 as state tax paid, you do not declare the $500 refund on the Federal. If on the other hand you deducted $1500 as state tax paid, then you would have to declare the refund on the Federal return in the year you received it.

Am I correct on this Tax Guy?

You could do it that way, but you would probably trigger an income matching audit. The state refund is reported to the IRS, and the IRS computer will see that you itemized and it will be looking for the refund to be reported. You would not be in any trouble, or get fines, interest or penalties. You would however have to deal with the inquiry. Again, remember this doing a llookback at last year. So the issue is, did you itemize in the year in which the refund was owed and then the refund came in the following year. So, if you received a State refund in 2007, it would be for 2006, and the question is did you itemize your deductions in 2006? If you itemized in 2006, the 2006 refund received in 2007 is taxable and that is how the IRS expects it. I am not sure what you are trying to do. Are you saying that you are not deducting as much tax in 2006 as you paid and therefor don't need to declare the refund? Please give us an example.

Thanks,
-Marc
www.pdcalc.com

Marc,

I think you're missing the point I tried to make in my earlier post. There are two state tax dollar amounts at play here. One is the amount withheld from your pay over the course of the year and the other is the actual amount of your state tax burden (as calculated on your state tax return and not yet taking into account what was already withheld). If the amount withheld is greater than the calculated amount that you owe for the year (your tax burden), then you get a refund. If your state tax burden is more than what was withheld, then you have to pay some additional amount.

Now when you file your Federal return and you itemize your deductions you can deduct your state taxes. If you deduct the amount that was withheld and that amount was more than your state tax burden, then the state amount refunded must be reported in the year it was returned to you (because you've claimed more than your actual tax burden). If however you claim the state amount as it's been calculated on your state tax form (your actual tax burden, not what was actually withheld), then you have no need to report the state refund since the refund represents a return to you of your overpayment.

I've filed this way for over 15 years and have never had any problem with the IRS since the numbers match. The amount of state tax I deduct on my Federal return exactly matches the amount of state tax I actually pay, not the amount which is withheld (which is only an approximation).