In 2022, state governments gave special payments to millions of tax payers around the country to help them cope with a variety of adverse economic effects, including inflation. The IRS has not yet provided definitive guidance on whether or not these payments, which may have taken the form of income or property tax rebates, are liable to federal income tax.
The IRS recommends that persons who received these state special payments wait to file their federal tax returns until more information is released, even though it expects to shortly provide more information on the taxability of these payments. The IRS advises those who have already filed not to submit an updated return at this time.
18 states in all, including California, Connecticut, Georgia, Hawaii, Illinois, Maine, Massachusetts, New York, Oregon, and Virginia, provided rebates in 2022. However, the reasons why each state provided these special payments varied, which can affect how the IRS decides whether or not they are taxable.
According to Annette Nellen, a tax expert at San Jose State University, if a payment was made primarily for disaster relief or general welfare purposes, it is probably exempt from federal income taxes. According to Jared Walczak, the Vice President of State Projects at the Tax Foundation, other elements like the payment’s intent (such as pandemic alleviation), means-testing, and itemization on tax returns may also be taken into account by the IRS when determining taxability.
The amount subject to federal income tax may not be significant because certain states limited the amount of special payments a taxpayer might receive. Taxpayers are advised to hold off on submitting their forms until the IRS clarifies the taxability of state special payments, and if necessary, seek advice from a tax expert.
For taxpayers who got special payments from their state government in 2022, the IRS’ news is crucial. It is advised for filers to postpone submitting their forms until the IRS provides more clarification because there is conflicting information regarding whether or not these payments are taxable. It is advised that you seek individualized guidance from a tax expert in the interim.
It is important to remember that the advice on state payments and federal income taxes is in flux and subject to change as the IRS releases additional information. In light of this, taxpayers who got special payments from their state government in 2022 should exercise caution and be ready to make any necessary changes to their tax returns.
Whatever the outcome, taxpayers who received special state payments in 2022 may rest easy knowing that the IRS is working hard to give them clear instructions as soon as possible to assist them in making decisions about their tax filings.