Taxable State and Local Tax Refunds
You have a taxable state or local tax refund if both of the following statements are true:

• You received a refund during 2002 of state or local income tax you paid in a prior year.

• In the prior year, you itemized deductions. If you're not sure whether you itemized deductions, look at your old tax return to see if you filed Schedule A. If you filed Schedule A, you itemized your deductions.

If your refund is taxable, you need to figure out the taxable amount. Subtract the standard deduction to which you were entitled in the prior year from the total amount of your itemized deductions for that year. Compare the result with the amount of your refund. The smaller of the two amounts is the amount to enter as your taxable state or local income tax refund.

For example, if you filed a joint return in 2001 on which you claimed $8,000 of itemized deductions, and you received a $1,000 refund of 2001 state income taxes during 2002, your taxable amount is $400:

2001 itemized deductions: $8,000
2001 standard deduction: $7,600
Difference: $400
Smaller of $400 and $1,000 = $400