Is my federal tax refund taxable? I know that state and local tax (SALT) deductions on my federal return can sometimes lead to a taxable state refund the following year if I received a tax benefit from claiming those deductions. But what about my federal tax refund? Does receiving a federal tax refund ever trigger a taxable event, and if so, under what specific circumstances? Is it dependent on specific tax credits or deductions I claimed, or perhaps related to a specific type of income I reported? I am trying to understand if I need to report my federal tax refund as taxable income on any future tax returns.

Answer

Generally, your federal income tax refund is not taxable. This is because it represents a return of money you already paid in taxes.

However, there’s a specific situation where a portion of your federal tax refund could be taxable:

• Itemized Deductions and State/Local Tax (SALT) Deduction Limit: If you itemized deductions on your federal tax return (Schedule A) and deducted state and local taxes (SALT), and that deduction resulted in a tax benefit (meaning it lowered your overall tax liability), you might have to include a portion of your state and local tax refund as income on your federal return the following year. This is only applicable if you had itemized deductions greater than the standard deduction and if you received a state and local tax refund the following year. There are forms available on the IRS website to determine the amount of state and local tax refund to be included as income.