In 2011, I received a state tax credit of $8000 for historic preservation. It had been assigned to me by my parents. In tax year 2011, $6000 in state income tax was withheld from my paycheck, which was $300 too much, so I was owed a refund from the state of $300. I applied $5700 of my state tax credit so that I got a refund of the entire amount withheld: $6000. I took the entire amount of Box 17 of my W-2 ($6000) as an itemized deduction for "Taxes You Paid" on Schedule A Line 5a for tax year 2011. As a result, I was issued a 1099-G for $6000, since I received a state tax refund, credit, etc. in 2012. Do I now owe federal income tax for 2012 of the entire amount of $6000, or just the refund part of $300? It doesn't seem right that I would owe income taxes on the state tax credit portion of $5700. Also, did I fill in Schedule A Line 5a correctly for tax year 2011?

“As a result, I was issued a 1099-G for $6000, since I received a state tax refund, credit, etc. in 2012. Do I now owe federal income tax for 2012 of the entire amount of $6000, or just the refund part of $300?”==========Not entire amount of $6K;however, as you itemized deductions on Sch A of 1040 on your 2011 return, you need to include in your gross income, the LESSER of the refunded amount of $300 OR your excess itemized deductions; I mean assume that for 2011 you deducted itemized deduction of $10,000 , then your excess itemized deduction equaled $4200.$ $10,000-$5,800, std deduction for 2011, then you need to report $300 on line 10 form 1040.
“ It doesn't seem right that I would owe income taxes on the state tax credit portion of $5700. “======No
“Also, did I fill in Schedule A Line 5a correctly for tax year 2011?”=======To deduct your state tax on your return, you need to report the state tax liability on Sch A of 1040 line 5a.