2022 State Special Payments Mostly Excludable from Federal Income
On February 10, 2023, the Internal Revenue Service (IRS) issued guidance clarifying the federal tax status involving special payments made by 21 states during the 2022 tax year. This clarification came a week after the IRS advised taxpayers to wait for guidance relating to special payments before filing their 2022 individual tax returns.
Federal Tax Treatment of State Special Payments
In 2022, 21 states made payments to households that can be classified as either general welfare and disaster relief payments or state tax refunds. There was uncertainty as to whether these payments were includable in federal income, which left taxpayers waiting to file their returns until further guidance was provided.
Last week, the IRS determined that in the interest of sound tax administration and other factors, taxpayers in many of these states will not need to report these payments on their 2022 federal tax returns. Now that the guidance has been provided, taxpayers can file their individual tax returns in a timely manner.
General Welfare and Disaster Relief Payments
Payments that are made for the promotion of the general welfare or as a disaster relief payment may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. An example of this would be payments made by states that were related to the ongoing pandemic.
The determination of whether payments qualify for these exclusions is typically complex and time intensive. However, the IRS has simplified this for the 2022 tax year through the guidance released last week. The IRS stated that it will not challenge the treatment of the 2022 state payments as excludable for federal tax purposes in the following states:
- Alaska*
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Hawaii
- Idaho
- Indiana
- Maine
- New Jersey
- New Mexico
- Oregon
- Pennsylvania
- Rhode Island
* Only for the supplemental Energy Relief Payment received; the annual Permanent Fund Dividend payment is includable in federal income.
Refund of State Taxes Paid
If a taxpayer receives a payment that is a refund of state taxes paid and either claimed the standard deduction or itemized their deductions but did not receive a tax benefit, then the payment should not be included in income for federal tax purposes.
Payments received from the following states that will be excluded from income for federal tax purposes in 2022, unless the recipient received a tax benefit in the year the taxes were deducted, include:
- Georgia
- Massachusetts
- South Carolina
- Virginia
States with Multiple Payments
Illinois and New York both issued multiple payments. In each case, one of the payments was a refund of state taxes and one of the payments was in the category of disaster relief payments. The treatment of these 2022 state tax payments should be as noted above for each applicable payment.
For any questions related to 2022 state tax payments received, please contact your Brown Schultz Sheridan & Fritz advisor.