Schedule 1, Line 1 - Taxable State Income Tax Refund

A state income tax refund resulting from a prior year tax return is reported on Form 1099-G. Part or all of this amount may be taxable in the year received; for example, a state income tax refund for the previous return may be taxable on the current federal return.

The refund amount is NOT taxable if there was no benefit to the taxpayer, in the prior year, from the overpayment of state taxes that resulted in a refund.
To accurately calculate the taxable amount, the taxpayer’s prior year federal tax return, or an IRS transcript of the return, MUST be available.

If the tax return or a transcript is not available, then the refund can be assumed to be not taxable only if it’s obvious the taxpayer took the standard deduction in the prior year. If it isn’t obvious, then either the entire amount of the refund must be treated as taxable or the return is out-of-scope.

Note: It’s rare for the year in box 3 of the Form 1099-G to be for anything other than the preceding year. – Exceptions: a state return or amended return filed late, or some similar belated action. If box 3 is not the preceding year, see the Tax-Aide Scope Manual.

CA process note: CA uses an abbreviated version of the normal Form 1099-G, with only boxes 1 through 3.
No amount is to be reported as a taxable refund (no action is required for Schedule 1 Line 1) if any of the five criteria below is true:

The taxpayer did not get a Form 1099-G, and (if available) the CA return for the prior year shows no state tax refund (CA Form 540, page 4, line 97).
The taxpayer did not itemize in the prior year (there was no Schedule A for the federal return).
The taxpayer did itemize in the prior year (there was a Schedule A), but used general sales tax (the box for line 5a is checked) rather than state and local income taxes.
The taxpayer did itemize in the prior year, but real estate taxes paid plus personal property taxes paid totaled $10,000 or more, the maximum allowable for state and local taxes of all types.
The taxpayer did itemize in the prior year, and did deduct state and local income taxes, but this had no benefit because the following is true:

Line 11b, “Taxable income”, on the prior Form 1040 is zero, and still would be zero if the standard deduction had been taken on Line 9. (For 2022, the standard deduction was $12,950 for single and MFS filers, $19,400 for HoH, and $25,900 for MFJ. Those 65 and older, and/or blind, got an additional $1,750 if not filing MFJ; for those filing MFJ, the potential increase was $1,400 for the taxpayer, $1,400 for the spouse.)

If the taxpayer has a Form 1099-G, and/or the prior state tax return shows a refund, and none of the conditions listed in the paragraph above are met, then determine how much of the refund is taxable.

This calculation requires a copy of, or electronic access to, the prior tax return, not just the Form 1099-G. If the return isn’t available, then the taxpayer has the choice of assuming that all of the refund is taxable, or of getting a copy of the tax return (finding it at home, for example), or of getting a return transcript (check box 6a on Form 4506-T, Request for Transcript of Tax Return).
New: TaxSlayer now includes any state refund in carryforward if used for itemizing on the prior return.
Part of the calculation may involve the amount of general sales tax that could have been claimed on Schedule A. If the electronic version of the prior tax return is available, it may include this number [Deductions > Itemized Deductions > Taxes You Paid > Add Sales Tax Worksheet]. Otherwise the sales tax must be looked up online, then entered in TaxSlayer. This IRS calculator is at apps.irs.gov/app/stdc/ .
Go to the State Refund Worksheet page [Income > Form 1099-G Box 2], discussed on page D-20 of Pub 4012.

Use the “Taxable Refund and Recovery Calculator” at cotaxaide.org/tools/ (recommended) and enter the result in the “Bypass State Refund Worksheet” box.
Use the TaxSlayer worksheet – not recommended; far too simplistic, and likely to determine too high an amount as taxable.

Note: It’s possible, though rare, to get a state tax refund during the tax year that’s for a state tax return prior to the previous year. In that case, the current return is out-of-scope unless the refund is either wholly nontaxable or is treated as wholly taxable. You should use the five criteria listed above [“No amount is to be reported as a taxable refund… ] to determine if the refund is nontaxable. If it meets none of those criteria, then the taxpayer can either agree to treat it as fully taxable or will have to use something other than Tax-Aide to do the return.
Note for CA state returns: Because CA doesn’t allow state taxes to be used as part of CA itemized deductions, any amount on Schedule 1 Line 1 is not taxable on the CA return. TaxSlayer makes the adjustment automatically on CA Schedule CA Part I, Section B line 1.