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You don't have to report your state income tax refund as income if the deduction the previous year didn't provide a benefit. Most tax software will do the calculation for you if you input the correct information.

Basically, you refigure your Schedule A using the general sales tax instead of the state and local income tax. If there is no change to line 7, none of your state and local income tax refund is taxable. If line 7 decreases, the change in line 7 represents the maximum amount of your state and local tax refund that is taxable income the next year.

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