Accounting question re tax refund

[Mike Alexander]

--On May 20, 2008 9:58:39 AM -0400 Roland Roberts 
<roland at astrofoto.org> wrote:

> I received a refund from the State of New York in 2007 for the 2006
> tax  year.  On my 2007 tax forms, I had to enter that refund.  It has
> a  special place on the form, but it effectively gets counted as
> income for  2007.  The reason for this is that it was not counted in
> 2006 (they  don't tax you on taxes).

I think the reason that state (not federal) tax refunds are taxed on 
your federal income tax return is that the state taxes you paid in 2006 
were deducted on your 2006 federal tax return.  You deducted what you 
paid in 2006, then the state gave you some of it back.  That meant you 
deducted more than you should have and you have to "undeduct" the part 
that was refunded.  If you can show that the state tax deduction in 
20006 didn't affect your federal income tax (for example because you 
took the standard deduction) the state refund isn't taxed in 2007.