Tax Status of State Special Payments Clarified

The IRS has issued clarification regarding the federal tax status of special payments made by 21 states in 2022. Taxpayers in many of these states will not be required to report these payments on their 2022 tax returns.

Disaster Relief & General Welfare Payments

Payments made for the promotion of general welfare or as disaster relief, such as those related to the COVID-19 pandemic, may be excluded from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Payments from California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island fall under this category, and the IRS will not contest the treatment of these payments as excludable for federal income tax purposes in 2022. Alaska is included in this group only for the supplemental Energy Relief Payment in addition to the annual Permanent Fund Dividend. In the cases of Illinois and New York, multiple payments were issued, with one payment being a refund of taxes to which the aforementioned treatment applies, and one payment falling under the category of disaster relief payment. A list of payments that fall under this category is available on the IRS website.

State Tax Refunds

If a payment is a refund of state taxes paid and the recipients claimed the standard deduction or itemized their deductions but did not receive a tax benefit (e.g., because of the $10,000 tax deduction limit), the payment is not included in income for federal tax purposes. 2022 payments from Georgia, Massachusetts, South Carolina, and Virginia fall under 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.

Other payments 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.

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