This year only part of my CA state refund is taxable. In the past ALL of it has been. What changed?

Only part of your refund was attributable to deductions or credits you claimed last year.   As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds.    The vast majority of taxpayers claim the standard deduction. 

Taxpayers who itemize their deductions on their federal income tax returns and receive a state tax refund must include the refund in income only if they deducted the state tax paid. Because of the $10,000 limit on itemized deductions for state income and property taxes, some itemizers are not able to deduct all the state taxes they paid and do not need to include a refund in income.

The tax benefit rule requires taxpayers to include in gross income amounts they receive that are attributable to deductions or credits they claimed in previous tax years.  However, taxpayers need not include these amounts in gross income to the extent the amounts did not reduce income tax in the year of the deduction or credit.  Recovered amounts are subject to tax at the rates that are in effect in the year of the recovery. 

It is possible that your state refund is taxable income. You may need to claim all or part of it if:

• You received a state or local income tax refund, credit, or offset.
• You itemized deductions on your federal tax return.

You had the option to choose to deduct either state and local income taxes or general sales taxes. If you chose general sales taxes, none of your refund is taxable.

If you chose state and local income taxes, your state refund is taxable. However, it’s only taxable to the extent that it’s more than the refund you would have received by choosing the larger refund from these:

• Standard deduction
• General sales tax