IRS won’t tax most state relief payments

The IRS has announced that most relief checks issued by states last year aren’t 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 in a statement released Friday evening.

“While in general payments made by states are includable in income for federal tax purposes, there are exceptions that would apply to many of the payments made by states in 2022,” the statement said.

Disaster and welfare payments are generally not taxable, and the IRS said it determined that payments in 17 states met that definition.

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.

In addition, taxpayers in Georgia, Massachusetts, South Carolina and Virginia also avoid federal taxes on state payments if they meet certain requirements, the IRS said.