Question

n 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: Although the $400 is included in federal income (due to the federal tax-benefit rule), California does not tax state tax refunds. You must subtract the refund amount from federal income when preparing your California return.