If I owe federal taxes and am expecting a state refund, will fed withhold the state?

If your Federal return for 2006 shows a balance due and you're expecting a refund from your state, the IRS will not attach your state refund.

However, if you have a pre-existing debt with the IRS and are making payments on that debt, it's almost a certainty that the IRS will attach your state refund and apply it against your Federal tax debt.

If you have an outstanding previous balance on your federal taxes, the state refund may be taken to satisfy the debt even if you are current on your payment arrangement.

No. The Federal government will not withhold your State tax refund in order to satisfy your Federal amount due. You should have your State refund sent as a direct deposit to your bank (so you can get it faster and safer). Then after your State refund gets deposited, write a check for your Federal tax due (before April 26th).

The Feds will also accept an EFW (electronic funds withdrawal) from your savings or checking account. I personally don't recommend this option to my clients because a canceled check is verifiable proof that they got paid.