Plenty of Americans are doubtless having feelings ahead of tax season. Whether you're dreading owning the government money or eager to get a fat check back from it, you're probably still not looking forward to all the confusing conditions and rules to follow. And if you're in the category of taxpayers that did receive a refund last year, does your tax refund count as income? It just might, depending how you filed last year.
Wait a minute — you might have to pay taxes on that amount of money you got back last year from the government because you paid too much during the year before that? Well, kind, and also kind of not. It's a hot mess. But hang tight.
Per Bankrate's experts, federal income tax refunds are never subject to being taxed, so you're in the clear there. But remember that there are different level of taxing by level of government — federal, state, and local. The real question comes with state and local taxes, which may count towards your income from last year, depending on how you handled your deductions. In short, only people that itemized their deductions in 2018 may need to declare their state and/or local tax refunds as income.
According to TurboTax's blog, three conditions have to be met in order for your state refund to be taxed as part of your income this year. First, you itemized your deductions when you filed in 2018 — meaning you didn't take the standard deduction. Next, you chose the option to deduct the state taxes, NOT the sales tax. Finally, taking that state tax deduction benefitted your tax refund or reduced your overall tax burden. If all three of those are true, it'll probably be taxable this year on the tax return. If not, you're probably in the clear. So basically, unless you went through those three very specific and kind of complicated steps, your should be golden.
As TurboTax advises, if you're using an automated return service like theirs, report any state tax refund you received (you may have gotten this in the form of a receipt in the mail) just to be safe, and they'll do the work of figuring out whether or not — and how much — that refund can be taxed.
But even if you do have to include your state tax refund as income, it's not as terrifying as it sounds. TurboTax adds, "Even when your refund is taxable, it may not be the entire amount. It depends on how much the deduction affected your refund or tax bill." In other words: You just have to pay taxes on the stuff you didn't already pay taxes on.
And remember, you're being taxed on the total amount, not paying back the total amount. So, if you received a $500 tax refund in 2018, you may need to include that $500 on your 2019 filing, but it doesn't mean you suddenly owe an extra $500. For anyone who's already in a low tax bracket because of a low income, an extra $500 in income probably won't change your overall tax burden that much or bump you up into a higher bracket altogether.
Keep in mind that, as always, it's best to rely on an expert or trusted service — or even get your questions answered directly by the Internal Revenue Service (IRS) if you aren't sure how to declare something when you file your return this year. There's nothing worse than actually having to pay back a tax refund given to you in error. So before you book a spring break trip to Mexico with your cash bump, be sure to get the help of an expert or service that'll help you avoid any mistakes, and file early to ensure you have enough time to get your questions answered as they arise. (And if you haven't already filed, I personally recommend queueing up "Money" by Cardi B on repeat for this task, for moral support.)