<p>"Yes, income tax refunds are income in the subsequent year."</p>
<p>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.</p>
<p>I'm not sure what happens with a state income tax refund if do not itemize deductions.</p>