Why do I have to pay tax on last years refund?

Question

It was money I earned the previous year, paid taxes on it, overpaid the IRS, & returned to me.
Every election year they talk tax reform but never address this issue.
Taxes were already paid on this money when I earned it, why do I pay taxes again when they return it?

Answer 1

If you received a 1099 int from the IRS, that is reporting the Interest that was paid to you by the IRS based on the amount of the refund you got. The IRS pays interest on refunds under certain circumstances, the Interest is taxable, not your refund.

Answer 2

You do NOT list Federal tax refunds as income on your tax return. Ever!

You do have to claim your State income tax refund as income IF you itemized deductions for the tax year in question AND claimed a deduction for State Income Tax paid.

If you didn't itemize your deductions for that year, the State refund is NOT included as taxable income on this year's return.

Answer 3

You don't pay taxes directly on your tax refund. It doesn't show up on the next tax year's return. All your tax refund represents is the amount of withholding your employer paid in advance in your behalf to the IRS. If you overestimated how much you paid in, you get it back. Your tax is based on your gross income, so I'm not exactly sure I'm following your logic here.

Answer 4

Who says you do?

Federal tax refunds are never taxable.

The only instance when a tax refund might be taxable is if it is a state refund.

Whomever tells you that federal refunds are taxable, tell them they are out of their minds!

The lady upstairs on the second floor likes to mismatch her federal and state refunds.
Tell her the refunds are mutually exclusive of each other.

Answer 5

Your Federal refund is not taxable on your federal return, only on your State return (not all states) because you over withheld. Most states treat this as income because your Federal tax is taken first, and then the state taxes you on the balance, so they see this excess as untaxed money.