IRS won’t tax most state relief payments
The IRS has announced that most relief checks issued by states last year, including those in Massachusetts, won’t be subject to federal taxes, providing 11th hour guidance as tax returns start to pour in.
A week after telling payment recipients to delay filing returns, the IRS said it won’t challenge the taxability of payments related to general welfare and disaster, meaning taxpayers who received those checks won’t have to pay federal taxes on those payments. All told, the IRS said special payments were made by 21 states in 2022.
“The IRS appreciates the patience of taxpayers, tax professionals, software companies and state tax administrators as the IRS and Treasury worked to resolve this unique and complex situation,” the IRS said Friday evening in a statement.
The states where the relief checks do not have to be reported by taxpayers are California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. That also applies to energy relief payments in Alaska that were in addition to the annual Permanent Fund Dividend, the IRS said.
In addition, many taxpayers in Georgia, Massachusetts, South Carolina and Virginia also avoid federal taxes on state payments if they meet certain requirements, the IRS said.
“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,” the IRS said about
Massachusetts and those three other states.
Rebate payments made by state government to taxpayers in 2022 “will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted,” the IRS said.
Tax revenues in Massachusetts blew past expectations last year, triggering a tax cap law known as Chapter 62F that required state government to return nearly $3 billion to taxpayers in proportion to how much income tax they owed.
In California, most residents got a “middle class tax refund” last year, a payment of up to $1,050 depending on their income, filing status and whether they had children. The Democratic-controlled state Legislature approved the payments to help offset record high gas prices, which peaked at a high of $6.44 per gallon in June according to AAA.
A key question was whether the federal government would count those payments as income and require Californians to pay taxes on it. Many California taxpayers had delayed filing their 2022 returns while waiting for an answer. Friday, the IRS said it would not tax the refund.