The IRS has finally published guidance stating that state payments and cover relief payments will actually not be taxed after warning millions of Americans that they may need to alter their taxes. So, at least on the federal level, you can go ahead and file your taxes without any problems. Read more here.
Last Friday, the IRS said that special payments made by 21 states in 2022 will not be taxed by the federal government. This is good news for a lot of taxpayers. The payments, which have been called "stimulus checks," "inflation relief payments," and "tax rebates," were sent to eligible people across the country in different amounts and through different programs. Some of the so-called "stimulus" payments from the states, which often came from state budget surpluses caused by the pandemic, are still being given out in 2023.
The IRS said that the tax situation around the payments was "unique and complicated." The IRS recently told taxpayers who had received special payments to wait until 2022 to file their tax returns so that the agency could decide if the payments were taxable income. After looking into it, the IRS said it won't argue that most of the special state payments should be taxed.
The IRS announcement talks about different kinds of state payments that will be given out in 2022. First, the IRS decided that it won't question special payments to states in 2022 that were made for "general welfare and disaster relief."
These sixteen states also made payments to residents in 2022 that the IRS classified as "general welfare and disaster relief." So, if you live in one of these states, the IRS will not challenge the tax treatment of your state special payments.
Alaska: Some of the special supplemental energy relief payments made to Alaskans in 2022 are deemed to be "connected to general welfare and catastrophe relief" by the IRS. The IRS won't contest the payments because they fall under the same heading as other state inflation relief payments. Yet, certain jurisdictions (such as Alaska) also gave people other payments, which according to the IRS are often taxable for federal income tax purposes. Because of this, the IRS will assume that certain payments made by other states to employees as remuneration, including those made by Alaska's Permanent Fund Dividend, are normally taxable on federal returns.
The IRS will occasionally remove special 2022 payments from income if you reside in a state where they were considered "refunds of state taxes paid." During 2022, qualifying citizens in Georgia, Massachusetts, South Carolina, and Virginia got particular tax rebates that fit that description.
The IRS states that the special state tax refund won't be taxable on your 2022 federal income tax return if you received one of those special state tax rebates and claimed the standard deduction or if you itemized deductions but didn't obtain a tax benefit as a result. The $10,000 cap on state and local tax (SALT) deductions would be an example of "not getting a tax advantage" as a result of itemized deductions, according to the IRS.
In spite of the fact that states' "stimulus checks," "inflation relief payments," and "tax rebates" appeared to be prevalent in 2022, the truth is that most taxpayers don't get large payments from their states all at once. So, it's crucial to remember that the IRS' decision to not contest the taxability of those payments is special. The IRS notes in its release that it views its special state payments determination as a 2022 tax year issue because the pandemic emergency declaration is scheduled to expire in May.
What does this entail for you, then? According to the IRS's ruling, you probably don't need to record that income on your 2022 federal tax return if you are one of the millions of taxpayers who received a special state "stimulus," inflation relief, or other rebate payment during 2022.
Consult a professional at Vincere Tax before filing if you are unsure about whether any payment you have received is taxable. Keep an eye out for additional significant tax changes that can affect your tax return now that the 2023 tax filing season has started.