Why is my state tax refund taxable?

Many taxpayers are dismayed when they find their state tax refunds from the prior year become taxable income for this year. This video explain why this can happen sometimes, and how to calculate the taxable portion of a state tax refund. 2025 UPDATE: Under the One Beautiful Bill Act (OBBBA), the limit for deducting state and local taxes has been increased to $40,000 per return ($20,000 if Married Filing Separately). Therefore in the example with "Alice" and "Sam," their entire state tax refund would be taxable. To find out all about state and local tax deductions, click here:    • All about SALT - Deducting State and Local...   Resources and Information: IRS Publication 525: "Taxable and Nontaxable Income" (contains worksheets to calculate the taxable portion of a state tax refund): https://www.irs.gov/pub/irs-pdf/p525.pdf IRS Schedule A: "Itemized Deductions": https://www.irs.gov/pub/irs-pdf/f1040... Instructions for IRS Schedule A (contains the worksheet and tables for calculating a sales tax deduction): https://www.irs.gov/pub/irs-pdf/i1040... IRS Schedule 1: "Additional Income and Adjustments to Income": https://www.irs.gov/pub/irs-pdf/f1040... The Tax Geek on Twitter: @taxgeekusa The Tax Geek on Reddit: www.reddit.com/r/askataxgeek Image/Video Credits: Storyblocks.com The images of "Stephen," "Alice," and "Sam" were generated by thispersondoesnotexist.com and any resemblance between these images and any person(s), living or dead, is coincidental and not intended. Intro Music: "Bluesy Vibes" - Doug Maxwell - YouTube Audio Library Outro Music: "Modern Attempt" - Track Tribe via YouTube Audio Library DISCLAIMER: This video is for educational and informational purposes only. It is not intended to render tax advice or investment advice for individual situations. If you have questions regarding your particular situation, please consult with a qualified tax or investment professional. The information in this video is current as of date of publication, and is subject to changes.