The IRS has determined that, for reasons of sound tax administration and other considerations, taxpayers in many states will not be required to disclose these payments on their 2022 tax returns.
The Internal Revenue Service has provided clarification regarding the federal tax status relating to special payments made by 21 states in 2022 after receiving several days’ worth of requests from Taxpayers, state government organizations, and the National Taxpayer Advocate.
The IRS has determined that taxpayers in many states won’t need to report these payments on their 2022 tax returns in the interest of sound tax administration and other factors.
The IRS has decided that it won’t contest the taxability of payments for general welfare and disaster relief after conducting a review. Therefore, residents of Illinois, Colorado, New York, Oregon, Hawaii, Indiana, Connecticut, New Mexico, New Jersey, Delaware, California, Pennsylvania, Rhode Island, Idaho, Maine, and Florida are exempt from reporting these state payments on their 2022 tax returns. Alaska is included in this group as well, but for more detailed information, see below.
If they meet certain criteria, many taxpayers in Georgia, Massachusetts, South Carolina, and Virginia will also choose not to include state payments in their income for federal tax purposes. Suppose the payment is a refund of state taxes already paid and the recipient either claimed the standard deduction or itemize their deductions but did not receive a tax benefit. In that case, state payments will not be included for federal tax purposes for these people.
The IRS is grateful for everyone’s patience while the IRS and Treasury worked to resolve this unusual and complicated situation, including taxpayers, tax experts, software providers, and state tax administrators.
The IRS is aware of inquiries relating to special tax refunds or payments made by specific states concerning the pandemic and its effects in 2022. These payments were distributed in 2022 by a number of state programs, and the rules governing how they should be treated for federal income tax purposes are complicated. There are exceptions to the general rule that payments made by states are deductible from income for federal tax purposes, but many of the payments made by states in 2022 would fall under one of these exceptions.
The IRS is offering the additional details below to help taxpayers who have received these payments file their returns on time.
Refund of paid state taxes
Suppose the recipient claimed the standard deduction or itemize their deductions but did not receive a tax benefit (for instance, because the $10,000 tax deduction limit applied). In that case, the payment is not considered income for federal tax purposes if it is a refund of state taxes paid.
Unless the recipient received a tax benefit in the year the taxes were deducted, payments from Georgia, Massachusetts, South Carolina, and Virginia in 2022 fall under this category and will not be considered income for federal tax purposes.
Payments for general welfare and disaster relief
For federal tax purposes, payments made for the promotion of the general welfare or as disaster relief payments, such as those for the ongoing pandemic, may qualify as Qualified Disaster Relief Payments and be excluded from income. A complex fact-intensive inquiry that depends on a number of factors determines whether payments fall under these exceptions.
The IRS has examined the types of payments made by various states in 2022 that may fall into these categories, and given the difficult fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for people who are currently 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 pan-state payments are made in 2022, the pan-state payments will not be treated as federal tax payments. The IRS won’t object if a taxpayer treats one of these payments as excludable from income on an original or amended return if they don’t include the full amount in their 2022 income for federal income tax purposes.
Payments from the following states fall under this category, and the IRS won’t object to their treatment as excludable for federal income tax purposes in 2022.
- Alaska: Just for the extra Energy Relief Payment that was received in addition to the yearly Permanent Fund Dividend.
- Illinois issued a number of payments, one of which was always a tax refund, which should be handled as stated above, and another of which was a payment for disaster relief.
- Jersey, New
- North Mexico
- In each case, New York issued multiple payments, one of which was a tax refund, which should be handled as previously mentioned, and one of which fell under the category of disaster relief payment.
- Providence, RI
Please refer to this chart for a list of the specific payments to which this applies.
In general, other payments that the states may have made are deductible from income for federal income tax purposes. This includes any charges from states made as worker compensation, such as the Permanent Fund Dividend paid annually by Alaska.
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