I filed federal tax 2006 by using 1040NR-EZ form and deducted the state tax withheld during 2006 as an itemized deduction, which amount about $4700. Then in 2007 I received a state tax refund for tax year 2006 about $4100.

For federal tax return 2007 I change my status to resident, so I use 1040 form for filing this year. I'm not sure whether I should include state tax refund $4100 in my income?

I found that state tax refund is not taxable if my itemized deductions in 2006 is less than the standard deduction (which is $5150). However, someone told me that if I filed 2006 federal tax by using 1040NR-EZ I have to include state tax refund as income on my federal return 2007 anyway. Is it correct? So, what should I do with the state tax refund in federal tax return 2007?

Thank you in advance for your answer.

Yes, since you deducted the state income tax as an itemized deduction for the 2006 tax return, you need to claim the refund as income in 2007.

The standard deduction exception does NOT apply in your case.