Question

In 2024, Kamden received a $400 refund from the Franchise Tax Board for the amount of state tax that he overpaid in 2023. He was able to reduce his 2023 federal tax liability by itemizing and claiming a deduction for state and local income taxes paid that year. The $400 is fully taxable on his 2024 federal return. How is the state refund reported on his 2024 California return?
It is a nonrefundable credit on the California return.
It is not taxable on the California return. A subtraction to federal income is required.
It is taxable on the California return. An addition to federal income is required.
It is taxable on the California return. No adjustment is required.

Answer 1

It is not taxable on the California return. A subtraction to federal income is required.

Explanation: California does not tax refunds of California state income taxes. If the $400 refund was included in federal taxable income, you must subtract it on Schedule CA (540) to remove it from California income. If it was not included on the federal return, no California adjustment is needed.