it is probably your state income tax refund. If you itemized deductions including state income taxes paid for the tax year you got the refund for, you need to report this as income in the year you received the refund (presumably 2012). If you didn't itemize and write off your state income taxes on a federal return, you don't have to pay taxes on this amount.
Foe example, let's say in 2011 your employer withheld $10,000 in state income taxes in 2011. Then you take it as an itemized deduction on Schedule A for $10,000 on your 2011 federal taxes. Then let's say when you file your 2011 state income tax return, you get a refund of $1,000 in 2012. Since you paid $9,000 in total taxes ($1,000 was refunded in 2012), you have to declare that $1,000 as income in 2012 to get you to the actual state taxes you paid of $9,000. If you didn't take that $1,000 refund to income in 2012, you would've shorted Obama $1,000 in income to tax you on.
If you didn't itemize the state taxes withheld, you don't have to declare anything as income since there was no way you could've shorted Obama on your taxible income (you took the standard deduction instead of the itemized deductions).
There is a spot on the front of the 1040 federal form to put refunds of state and local taxes, if applicable.
This post was edited on 1/16 at 7:36 pm