Tax Planning Timely Financial News

IRS Issues Guidelines on State Tax Payments

BY Spectrum Wealth Management | Mar 20, 2023

The IRS has identified 21 states that made special payments to taxpayers in 2022. After a review of those special payments, the IRS has determined that taxpayers in many states will not need to report those payments on their 2022 federal income tax returns. Special payments in four of those states should be treated as refunds of state taxes paid, and taxation is determined under the general federal income tax rules for state tax refunds. Special payments in 17 states are treated as made for the promotion of the general welfare or as a disaster relief payment and are excluded from income for federal tax purposes. Illinois and New York are listed in this category but seem to have provided a mixture of payments that fell into multiple categories (see below).

If you have already filed your 2022 federal income tax return and omitted one of these special payments when it was required to be included in your income, you may need to file an amended tax return and pay any additional tax due. If you included one of these special payments in your income when it did not need to be included, you may need to file an amended tax return in order to get a federal income tax refund with respect to the special state tax payment.

Refund of state taxes paid

The IRS has concluded that the special payments from the following states in 2022 are treated as a refund of state taxes paid, and the appropriate analysis under the general state tax refund rules should be made.

  • Georgia
  • Massachusetts
  • South Carolina
  • Virginia

Under general rules, if the payment is a refund of state taxes paid, the payment is excluded from federal income tax unless the recipient received a tax benefit in the year the taxes were deducted on the federal income tax return. Thus, the recipient does not need to include thee payment in income if the recipient claimed the standard deduction or the taxpayer itemized deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) in the year the state taxes were deducted.

General welfare and disaster relief payments

The IRS has determined that the special payments from the following states in 2022 were made for the promotion of the general welfare or as a disaster relief payment and are excluded from income for federal tax purposes.

StateState Payment Program
Alaska*Energy Relief Payment
(supplementing the Permanent Fund Dividend)
CaliforniaMiddle Class Tax Refund
ColoradoColorado Cash Back
ConnecticutChild Tax Rebate
DelawareRelief Rebate Program
FloridaPandemic Temporary Assistance to Needy Families
HawaiiAct 115 Refund
Idaho2022 Tax Rebate
Illinois**Individual Income Tax Rebate/Property Tax Rebate
IndianaAutomatic Taxpayer Refund #1/Automatic Taxpayer Refund #2
MainePandemic Relief Payments
New JerseyITIN Holders Director Assistance Program
New MexicoMultiple rebate and relief programs
New York**Supplemental Child Credit and Supplemental Earned Income Tax Credit
OregonOne-Time Assitance Payments
PennsylvaniaOne-Time Bonus Rebates
Rhode Island2022 Child Tax Rebates
*Exclusion is only for the Supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend. **The IRS stated 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.” It seems that additional guidance from the IRS is needed here to identify the tax treatment of specific payments.

Other payments

The IRS adds that other payments that may have been made by states (e.g., payments from states provided as compensation to workers) are generally includable in income for federal income tax purposes.

Note: The IRS has determined the federal income tax status of special payments made by 21 states in 2022.

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