A state or local tax refund will only be taxable IF the taxpayer itemized on the previous year’s tax return. So if in 2012, you filed a Sch A ( the federal itemization form) AND deducted state and local taxes on that form, then any refund you received would be taxable income for the 2013 tax return. It’s possible that not the entire refund will be taxable. If the Sch A deductions were only slightly above the standard deduction, it may pay to do the worksheet to determine if some of that refund could be tax free. Your preparer will generally do it automatically for you, or you can find the worksheet in the 1040 instruction booklet.
Those that are still waiting on a Detroit city refund (or any refund from a city in similar circumstances) may not receive the refund at all. No refund is taxable unless it was received either in the form of a check or applied to a debt or an estimate. So make sure you let your preparer know if you didn’t receive the refunds expected. A good preparer should actually ask you. If you work for a city in financial trouble such as Detroit, it might be better to adjust your city withholding at work to make sure that you will actually be writing a small check rather than receiving a refund since you can’t be assured of receiving refunds at this time.