Is a ‘disaster distribution’ the same as a ‘stimulus check’? Differences that you should to know
The IRS offers tax exemptions for certain emergency-related payments and early withdrawals to reduce recipients’ tax bills.
During the pandemic there have been a number of financial relief programs designed to support Americans through a tumultuous time for the US economy. The three rounds of federal stimulus checks were the most well-known of these efforts but there were countless other examples throughout the pandemic emergency declaration.
Under the emergency declaration, most recipients will not be taxed on the payments that they received. But there are still some major difference between two popular forms of tax-exempt support: disaster distribution and stimulus checks.
What is a disaster distribution?
Under normal conditions retirement plan participants are taxed on any funds that they prematurely withdraw from their retirement pots, typically with an early distribution tax of 10%.
However the Disaster Tax Relief and Airport and Airway Extension Act of 2017 allowed victims of federally designated disasters to make an early withdrawal. The pandemic was designated as a federal emergency in March 2020 and that status will run until 11 May 2023, meaning that the tax exemption applies for anyone making an early withdrawal to pay for pandemic-related expenses.
What is a stimulus check?
Stimulus checks, known officially as Economic Impact Payments, were distributed by the federal government during the first two years of the pandemic. They were designed to offer short-term financial relief for Americans suffering the economic consequences of covid-19.
Like disaster distributions, stimulus checks are also free from federal taxation.
The term ‘stimulus check’ has also been applied to the various state-led initiatives introduced in 2022 to help residents dealing with a spell of sustained high inflation. More than 20 states distributed these types of payments last year, most notably California’s Middle Class Tax Refund.
Are inflation relief payments tax-free?
The raft of relief programs initiated by states in 2022 was unlike anything seen before, and it posed a new question for the IRS. Should these state-funded payments be subject to federal taxation?
The tax agency was slow to offer guidance and filers began the 2023 tax season without a firm answer on whether the relief payments counted as taxable income. At the start of February the IRS advised that recipients hold off on submitting their taxes, until a verdict was finally reached.
The IRS released a statement confirming that the special payments made by 21 states in 2022 do not need to be reported as taxable income on their 2022 tax returns.
“During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief,” the IRS statement read.
“While in general payments made by states are includable in income for federal tax purposes, there are exceptions that would apply to many of the payments made by states in 2022.”