IRS won't tax most state relief payments

Subsidies, refunds given to taxpayers to counter inflation.

The IRS will not collect federal taxes against state-issued inflation relief payments or tax refunds, the agency said Friday, a reprieve for tens of millions of taxpayers who received the subsidies.

The IRS had previously asked taxpayers to hold off filing their returns as officials determined if the state payments were federally taxable, an unusual statement for an agency that has long called for submitting returns as quickly as possible. Tax filing season began Jan. 23.

Friday’s announcement means taxpayers in more than 20 states can now file their taxes. Residents of Alaska, California, Colorado, Connecticut, Delaware, Flor- ida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island will not have any taxes collected against state payments or tax refunds and do not need to report them on their returns, the agency said.

The IRS said the payments made by those states were “for the promotion of the general welfare or as a disaster relief payment,” and there- fore are not federally taxable.

People in Georgia, Massa- chusetts, South Carolina and Virginia will have to report state payments as income, unless the recipient claimed the standard deduction, or itemized deductions but did not receive a tax benefit, the IRS said.

Flush with excess revenue stemming from wage gains in 2021 and 2022, nearly two dozen states issued payments to combat inflation over the summer.

California’s middle-class tax refund distributed payments worth between $200 and $1,050; close to 16 million Californians have received the payouts already, and 23 million are eligible. New York awarded inflation relief payments worth $270 for averageto-low-income residents and enacted rent and property tax relief. Oregon sent one-time $600 checks to low-income households, and Georgia gave tax filers a $500 credit after they submitted their 2021 return.

The decision on state payme n ts came on the same day the IRS reported encouraging service numbers. According to a Treasury Department official spoke on the condition of anonymity to discuss internal data, the agency has answered 88.6% of its phone calls from the start of tax filing season through Feb. 4, up from the 13% of calls answered during the 2022 tax season and 11% the year before.