State and Local Refunds
Taxpayers who receive a refund of state or local taxes may receive Form 1099-G, Certain Government Payments, with their refund amount shown in box 2. Not everyone must include the refund in their taxable income.
Only those taxpayers who itemized deductions and received a federal income tax benefit for deducting their state or local income taxes have to include their state/local tax refunds in income. If they itemized deductions and deducted the state sales tax instead of the state income tax withheld, none of the refund is taxable.