If you itemized deductions on your federal income tax return for 1995 or a prior year, and received a refund of state or local taxes in 1996, you may have to include all or part of the refund in your income on your 1996 tax return. You should receive Form 1099-G, Certain Government Payments, advising you of the refund amount.

If any of your refund is taxable, you must file Form 1040. You can usually use the worksheet in the Form 1040 instructions to determine the taxable portion of your refund.

However, if any of the exceptions listed in the instructions applies to you, get Publication 525, Taxable and Nontaxable Income. It contains further information on how to compute the taxable portion of the refund, and special worksheets you can use.

If you did not itemize your deductions on your federal tax return for the same year as the refund, do not report any of the refund as income. Interest you may have received on that refund must be reported as interest income in the year received.

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