What should I do about my 1099-G? Is there an easy way to tell the california state tax board that they did issue me a refund but then I gave them some of the money back due to the underpayment?
Do nothing, at least as far as the feds are concerned (your question wasn't clear).
You paid CA tax in 2011 but took the standard deduction on your 2011 federal return.
You got a refund from CA in 2012 of some of your 2011 CA tax paid. None of that is taxable on your federal return as you didn't deduct it and got no benefit.
You then paid CA some tax in 2012. It doesn't matter if it is for 2009, 2010, 2011, or 2012. It's tax paid to a state, and you can deduct it on your federal return.
I don't know if that is your question, but I hear my soap calling.
If you had paid CA an estimated 2011 tax payment on 1/10/2012, you couldn't deduct it on your 2011 federal return as it wasn't paid in 2011 even if it went toward your 2011 CA tax. You can deduct it on your 2012 federal return as it was a tax paid to a state in 2012. For the feds, it's when you pay, not the year you are paying for.
For the IRS, the 1099-G refund may or may not be taxable and listed on Form 1040 line 10 depending on whether or not you itemized for 2011. The extra in taxes may be deducted on Schedule A line 5a if you itemize for 2012.
For CA FTB, the 1099-G refund will be removed from your Form 540/540A income at line 14a. The extra in taxes is ignored for state purposes.
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