the 1099G is refunds of State and Local Income Tax Deductions
A refund of state or local income tax is not taxable if you did not previously claim the tax as an itemized deduction in a prior year. For example, if you claimed the standard deduction on your 2003 return and in 2004 you received a refund for state tax withheld from your 2003 wages, the refund is not taxable on your 2004 return.
If you claimed the refunded tax as an itemized deduction but you received no tax benefit because you were subject to alternative minimum tax (AMT, which does not allow the deduction; see 23.2 ), the refund is not taxable. If you claimed the refunded tax as an itemized deduction and were not subject to AMT, the refund is taxable only to the extent that your itemized deductions exceeded thestandard deduction you could have claimed in the prior year. If, in addition to the refund of state or local income tax, you received recoveries of other itemized deductions, the same computation applies to determine the taxable portion of the total recovery;see 11.6.
The computation of the taxable refund is different if, in the year the refunded item was claimed, you were subject to the 3% reduction of itemized deductions. In this case, the IRS provides a special method explained in Publication 525.
EXAMPLE
On your 2003 return, you filed as a single taxpayer. You claimed itemized deductions of $5,100, of which $2,900 was for state and local taxes, $1,600 was for mortgage interest, and $600 was for charitable contributions. Your deductions exceeded by $350 the $4,750 standard deduction you could have claimed. The deductions were not subject to the 3% reduction discussed at 13.7 and you were not subject to alternative minimum tax.
In 2004, you received from the state a $750 refund for 2003 state income tax. You must report $350 of the refund as income on your 2004 Form 1040. The taxable recovery is limited to the $350 difference between the claimed itemized deductions of $5,100 and the $4,750 standard deduction for 2003.
If you had a negative taxable income in 2003, the taxable recovery figured under the above rule is reduced by the negative amount. If you had a negative taxable income of $100 in 2003, only $150 of the refund would be taxable.
