Answer: This is a question that I bet we are asked at least three times a day during tax season. The State sent you a form 1099-G to report as income the amount of the State tax refund you were paid last year because this is taxable income to you in the current year if you itemized your deductions on last year's return. When your return was prepared you took an itemized deduction for the full amount of the State taxes which were withheld from your payroll, you found this number on your form W-2. Your deduction was for the full amount of tax which was withheld from you pay, but your tax burden was less than this withholding since you received a refund. You actually took a tax deduction for taxes which you did not owe, therefore, the refund becomes income in the year where you receive the refund. This only applies when you itemized your deductions since that is the only way you would have taken the deduction. This is something that you MUST report since the State will be sending a copy of the Form 1099-G to the Internal Revenue Service and they will no doubt send you a summer letter adjusting your federal return if the refund is not claimed as income.
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