A taxpayer received a $5,000 state income tax refund in Year 2 for taxes paid in Year 1. In Year 1, the taxpayer took the standard deduction. How much of the refund is taxable in Year 2?

Under the tax benefit rule, a refund of state taxes is taxable only if the taxes were deducted in a prior year and provided a tax benefit. Since the taxpayer took the standard deduction, they did not deduct the state taxes, so the refund is not taxable.