In $2023,$ Enya received a $$400$ refund from the Franchise Tax Board for the amount of state tax that she overpaid in $2022.$ She was able to reduce her $2022$ federal tax liability by itemizing and claiming a deduction for state and local income taxes paid that year. The $$400$ is fully taxable on her $2023$ federal return. How is the state refund reported on her $2023$ California return?

It is a nonrefundable credit on the California return.

It is not taxable on the California return. A subtraction to federal income is required.

It is taxable on the California return. An addition to federal income is required.

It is taxable on the California return. No adjustment is required.