IRS Advises That 2022 State Relief Payments Should Not Be Reported as Income

(Parker Tax Publishing February 2023)

In a press release, the IRS clarified the federal tax status of special payments made by 21 states in 2022. The IRS determined that, in the interest of sound tax administration and other factors, it will not challenge the taxability of payments related to general welfare and disaster relief and therefore, taxpayers who received these payments generally do not need to report them on their 2022 federal income tax returns. IR-2023-23.

Background

In 2022, twenty-one states made special payments to taxpayers as relief for rising prices. For example, California issued a one-time "middle class tax refund" of up to $1,050 to California residents meeting certain adjusted gross income and other qualifications. Taxpayers and practitioners expressed uncertainty as to the taxability of these payments for federal income tax purposes.

On February 3, the IRS posted a statement on its website (IRS Statement - Taxability of State Payments) saying that it was aware of questions involving these special tax refunds or payments made by states in 2022. The IRS said that it was working with state tax officials to provide additional information and recommended that taxpayers who were uncertain about the taxability of their state payments should wait until additional guidance was available.

On February 10, the IRS issued additional guidance (IR-2023-23) indicating that, in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns.

Specifically, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.

In addition, the IRS stated that many people in Georgia, Massachusetts, South Carolina and Virginia also will not include state payments in income for federal tax purposes if they meet certain requirements. For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient (1) claimed the standard deduction or (2) itemized their deductions but did not receive a tax benefit.

The IRS provided the following additional information regarding these payments:

General Welfare and Disaster Relief Payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment (for example, related to the outgoing pandemic), the IRS advised that it may be excludable from income for federal tax purposes under (1) the exclusion for payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare; or (2) as a qualified disaster relief payment under Code Sec. 139(a). The IRS noted that determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations.

The IRS said that it has reviewed the types of payments made by various states in 2022 that may fall in these categories and has determined that in the best interest of sound tax administration, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022:

(1) Alaska (see below for additional details)

(2) California

(3) Colorado

(4) Connecticut

(5) Delaware

(6) Florida

(7) Hawaii

(8) Idaho

(9) Illinois (see below for additional details)

(10) Indiana

(11) Maine

(12) New Jersey

(13) New Mexico

(14) New York (see below for additional details)

(15) Oregon

(16) Pennsylvania

(17) Rhode Island

With respect to payments made by the state of Alaska, the IRS noted that the above treatment applies only for the supplemental Energy Relief Payment which Alaska residents received in addition to the annual Permanent Fund Dividend (which is not excludable from income; see below under "Other Payments").

The IRS also noted that Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.

Refunds of State Taxes Paid

The IRS noted that 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 under Code Sec. 164(b)(6) applied), then the payment is not included in income for federal tax purposes.

According to the IRS, payments from the following states in 2022 fall in 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:

(1) Georgia

(2) Massachusetts

(3) South Carolina

(4) Virginia

Other Payments

Finally, the IRS advised that other payments that may have been 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.

For a discussion of the exclusion for general welfare payments, see Parker Tax ¶79.901. For a discussion of the exclusion under Code Sec. 139 for qualified disaster relief payments, see Parker Tax ¶79,301.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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