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Refunds of State and Local Taxes

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If you took an itemized deduction for state or local taxes on your Federal income tax return for 2003 or a prior year, and received a refund of those taxes in 2004, you may have to include all or part of the refund in your income on your 2004 tax return. You should receive Form 1099-G (PDF), Certain Government Payments, advising you of the refund amount. You can usually use the worksheet in the Form 1040 Instructions to determine the taxable portion of your refund. However, if any of the exceptions listed in the instructions applies to you, refer to Publication 525, Taxable and Nontaxable Income. It contains further information on how to compute the taxable portion of the refund, and special worksheets.

If you did not itemize deductions on your Federal tax return for the year to which the refund applies, do not report any of the refund as income. However, any interest you may have received on that refund must be reported as interest income in the year received.

Source: IRS.gov

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