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IRS Decides Not to Tax Relief Payments Issued by States

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Millions of taxpayers can breathe a sigh of relief after a last-minute panic over whether Uncle Sam would tax the state relief payments they received last year.

The IRS has decided that, long story short, it “will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.”

The Feb. 10 announcement comes a week after the IRS told taxpayers who received state payments to hold off filing their federal income taxes this season while the agency figured out whether the payments were federally taxable.

The most recent press release explained:

“The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.”

The 140-word sentence essentially means that if you received a state relief payment, you probably don’t need to report it on your federal tax return and the IRS probably won’t come after you for omitting the income from your return. (There are, of course, some exceptions.)

Many states issued payments to certain residents in 2022 as the COVID-19 pandemic continued and inflation rose higher than it had been in more than 40 years.

If you received a state payment last year, and it was “made for the promotion of the general welfare or as a disaster relief payment” — which includes pandemic-related payments — the IRS says you’re off the hook.

That means residents of the following states don’t have to report those payments on their federal returns:

  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Idaho
  • Indiana
  • Maine
  • New Jersey
  • New Mexico
  • Oregon
  • Pennsylvania
  • Rhode Island

In a few other states, residents received payments that were technically classified as state tax refunds. They may or may not need to report those refunds on their federal returns.

The IRS has decided it won’t count state tax refund payments as federally taxable income if “either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied).”

This situation applies to tax refunds issued by:

  • Georgia
  • Massachusetts
  • South Carolina
  • Virginia

In three other states, residents might have received multiple state payments in 2022, so things are a little more complicated. These states are:

  1. Alaska: Only the state’s Energy Relief Payment can be omitted from federal returns. Alaska Permanent Fund dividends remain federally taxable, as we explain in “13 Surprising Things That Are Taxable.”
  2. Illinois: One payment issued by the state is considered by the IRS to be a disaster relief payment and thus can be omitted from federal returns. The other payment was classified as a tax refund, so it can only be omitted if the above circumstances apply.
  3. New York: One payment issued by the state is considered by the IRS to be a disaster relief payment and thus can be omitted from federal returns. The other payment was classified as a tax refund, so it can only be omitted if the above circumstances apply.

As for other types of state payments — including those provided as compensation to workers — the IRS says they are generally taxable.

For more information, visit the IRS’ “State Payments” webpage.

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