Great news, everyone! The IRS has given us an update on the federal tax status of special payments made by 21 states in 2022.
In the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns. Specifically, the IRS won't challenge the taxability of payments related to general welfare and disaster relief. So if you live in any of the following states, you can relax and not worry about reporting these state payments on your 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, and even Alaska! (Note: Alaska has some additional requirements, so be sure to check those out.)
And that's not all - if you're in Georgia, Massachusetts, South Carolina, or Virginia and you meet certain requirements, you may not have to include state payments in your income for federal tax purposes. So if the payment is a refund of state taxes paid and you either claimed the standard deduction or itemized your deductions but didn't receive a tax benefit, you're in luck!
Refund of state taxes paid
If the payment is a refund of state taxes paid and 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) the payment is not included in income for federal tax purposes.
Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.
Georgia
Massachusetts
South Carolina
Virginia
General welfare and disaster relief payments
If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations.
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.
Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.
Alaska - Only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.
California
Colorado
Connecticut
Delaware
Florida
Hawaii
Idaho
Illinois - Illinois issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.
Indiana
Maine
New Jersey
New Mexico
New York - New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.
Oregon
Pennsylvania
Rhode Island
For a list of the specific payments to which this applies, please see this chart.
Other payments
Other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.
Looking for help with your 2023 tax returns? Look no further!
Our expert team at RP Financial Services is here to help. Contact us today at (720) 712-7724 or schedule your FREE consultation using the link: https://calendly.com/rpfs/consult-with-ea.
Let us take the hassle out of tax season so you can focus on what you do best. Don't wait, schedule your consultation now!
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