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"Yes, income tax refunds are income in the subsequent year."
I don't think that's quite right. If you itemize deductions, a state income tax refund for 2005 is reported as income on the 2006 federal income tax form, but federal tax refunds are not income. A federal refund has already been taxed. The state refund was not taxed. That's the difference.
I'm not sure what happens with a state income tax refund if do not itemize deductions.
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