The Internal Revenue Service recently provided 2022 tax return filing guidance on February 10 regarding the taxability of certain state tax payments paid by 21 states during 2022. The new guidance is good news for most taxpayers as many Americans will not have to report these one-time state tax rebates and refunds as federal income on their 2022 individual tax returns due in April. The IRS had been criticized recently by many elected officials and tax advisors for not addressing the taxability of these one-time payments earlier to avoid further tax season delays and IRS tax notices. Many states, including California, had already issued 1099s to taxpayers in January reporting the special 2022 state tax payment as taxable for federal tax purposes.
Welfare and disaster relief payments
During 2022, more than 20 states issued special one-time rebates and refunds to taxpayers that were similar to the federal stimulus payments issued during the Covid pandemic. The IRS ruled that a large majority of these one-time payments during 2022 generally fall under the general welfare and disaster relief provisions that allow for them to be excludable from federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment.
The IRS will not challenge the treatment of the 2022 payment as excludable for federal income tax purposes in the following 17 states as the payment qualifies as a welfare and disaster relief payment:
- Alaska
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Hawaii
- Idaho
- Illinois
- Indiana
- Maine
- New Jersey
- New Mexico
- New York2
- Oregon
- Pennsylvania
- Rhode Island
The IRS has also provided a chart of the specific state payments to which this IRS guidance applies with links to the various state tax payment program websites.
State tax refund payments
The IRS has determined that special 2022 state refunds for four states do not qualify as a disaster relief payment and are actually a refund of state income taxes resulting in the payment being included in 2022 income for federal tax purposes depending on if the taxpayer claimed the standard deduction or itemized their deductions on their 2021 individual tax return. The four states with 2022 payments being treated as state tax refunds are:
- Georgia
- Massachusetts
- South Carolina
- Virginia
The IRS also reminded taxpayers in their guidance that other ongoing state payments such as unemployment compensation are generally includable in federal taxable income as these payments do not qualify for the welfare and disaster relief tax exclusions.
PBMares clients with questions about the taxability of any state disaster relief and tax refund payments can reach out to Charles Dean Smith, Jr., CPA and Partner in the firm’s New Bern, NC and Wilmington, NC offices.