You asked whether state income tax refunds are taxed more than once and whether they are taxed at both the state and federal level.

State income tax refunds are not subject to double taxation. Each state income tax refund must be included in federal adjusted gross income (AGI) and is taxed only once.

State income taxes are deductible from federal income taxes. A taxpayer deducts the amount of state income taxes he paid or that was withheld from his wages for the year on line 5 of Form 1040, Schedule A. If he later receives a state income tax refund, it means he deducted taxes that he did not have to pay. Therefore, he is required to add back the amount of the refund in his federal AGI in the following year. He does this on line 10 of Form 1040. The refund amount entered on line 10 was not subject to federal taxation in the previous year because the taxpayer deducted it.

On his state income tax return, the taxpayer subtracts the refund reported on line 10 of his federal return from his Connecticut AGI (CT-1040, line 43). Subtracting the refund means that the state does not tax it. Thus, each state income tax refund is taxed once, on the federal level.

For your further information, we attach copies of these forms, with the relevant lines highlighted.

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