Suppose your state requires your employer to withhold state income taxes from your salary and wages. If you itemize your deductions on Schedule A instead of taking the standard deduction, the IRS allows you to deduct the state income taxes you paid.
In many cases, however, the total amount of state income tax withheld will exceed the amount of tax you’re actually responsible for paying.
- For example, suppose $5,000 is withheld from your 2014 wages for state income tax.
- After preparing your state income tax return, you find you only owe $3,500. The state should send you a refund of $1,500 in 2014.
- However, let's say you prepared your 2014 federal income tax return and took a deduction for state income taxes of $5,000.
- When you prepare your 2015 tax return, you'll need to report the $1,500 refund as income since the deduction you took in the prior year was too much.
If in the previous year you chose to deduct state and local sales tax instead of state income tax on your Schedule A, or chose the standard deduction, it is not necessary to report the amounts in box 2 since these state taxes would not be refunded by your state or local government. If box 8 of your 1099-G is checked, it indicates the amounts reported in box 2 relate to a trade or business you operate.