Taxable Refunds, Credits or Offsets of State or Local Income Taxes (2024)

FAQs

Taxable Refunds, Credits or Offsets of State or Local Income Taxes? ›

Taxable Refunds, Credits or Offsets of State or Local Income Taxes. If you receive a refund of (or credit for) state or local income taxes in a year after the year in which you paid them, you may have to include the refund in income in the year you receive it.

(4) The term credit or offset means an overpayment of tax which, in lieu of being refunded to the taxpayer, is: (i) Applied against an existing liability of the taxpayer, (ii) Available for application against a future liability of the taxpayer, or. (iii) Otherwise used or available for use for the taxpayer's benefit.

Contact your state's taxation department to learn about tracking your state tax refund status.

If you owe money to a federal or state agency, the federal government may use part or all of your federal tax refund to repay the debt. This is called a tax refund offset. If your tax refund is lower than you calculated, it may be due to a tax refund offset for an unpaid debt such as child support.

Box 2 of Form 1099-G shows the state or local income tax refunds, offsets, or credits you received, but these amounts typically only need to be reported if you took a federal deduction for paying those taxes in a prior year and that deduction actually reduced your federal taxes.

Your tax return may show you're due a refund from the IRS. However, if you owe a federal tax debt from a prior tax year, or a debt to another federal agency, or certain debts under state law, the IRS may keep (offset) some or all your tax refund to pay your debt.

For example, if you claim a tax deduction of $1,000 and your marginal tax rate is 34.5% including medicare levy, you will reduce your tax payable by 34.5% x $1,000 = $345. A tax offset directly reduces dollar for dollar the amount of tax you must pay after it has been calculated based on your taxable income.

If you owe a federal tax debt from a prior tax year, a debt to another federal agency, or certain debts under state law, the IRS may keep (offset) some or all your tax refund to pay your debt.

Because the IRS is separate from your state's Department of Revenue, sometimes you will receive your federal refund before your state refund, or vice versa.

You can access your federal tax account through a secure login at IRS.gov/account. View the amount you owe, along with details of your balance, your payment history, tax records, and key tax return information from your most recent tax return as originally filed.

What is the difference between offset and refund? ›

A tax offset is when your tax refund is withheld to pay your tax balances. If you have past-due taxes or a balance from another government agency but you're eligible to receive a refund this tax season, the IRS — or state tax agencies — may apply that refund to your past-due balance.

If you're unsure whether you owe money to the IRS, you can view your tax account information on IRS.gov.

If you owe unpaid tax debts to the federal government, the IRS has to follow the proper procedures in order to take money from your bank account. Generally, the IRS will only resort to a levy once these conditions are met: Tax is assessed and the taxpayer is sent a Notice and Demand for Payment.

Alternatively, your state/locality may have sent you a 1099-G form (if they haven't gone paperless). You should receive your 1099-G by mid-February if your state/locality still sends out paper forms. If you did get a 1099-G, make sure it's for a state/local tax refund, not unemployment compensation.

If you took an itemized deduction in an earlier year for taxes paid that were later refunded, you may have to include all or part of the refund as income on your tax return.

Failing to report income may cause your return to understate your tax liability. If this happens, the IRS may impose an accuracy-related penalty that's equal to 20% of your underpayment.

Tax credits are amounts you subtract from your bottom-line tax due when you file your tax return. Most tax credits can reduce your tax only until it reaches $0. Refundable credits go beyond that to give you any remaining credit as a refund. That's why it's best to file taxes even if you don't have to.

An offset is when the federal income tax refund you would have received is used to pay all or a portion of a debt owing to a federal or state agency. If the full amount owed is not collected in one year, future offsets may be done to satisfy your debt.

Your federal and/or state refunds are subject to offset when it is determined a tax debt is owed and has been turned over to the Attorney General for collection.

The IIC program intercepts (offsets) refunds when individuals and business entities owe delinquent debts to government agencies including the IRS and California colleges.