Which 2022 state special payments are not subject to federal income tax according to the IRS?
The IRS has resolved the “unique and complex situation” around the taxability of the special payments made to residents by several states in 2022.
Several states made a variety of special payments to residents during 2022 in the form of tax refunds or assistance for lingering consequences of the pandemic. While the financial boost to household incomes was welcome there were doubts about how they should be treated for federal tax purposes.
For this reason the IRS had asked Americans that received any such payments to hold off filing their 2022 tax return. On Friday, the agency announced that it and the Treasury had resolved “this unique and complex situation.”
“While in general payments made by states are includable in income for federal tax purposes,” the IRS had good news for millions of beneficiaries of special payments last year.
The IRS won’t tax special payments from seventeen states
There were 21 states that gave residents special payments in 2022. However, given how the payments were designated made a difference in whether or not they need to be reported on federal tax returns. The IRS said in an update of its guidance on special payments from states that it “will not challenge the taxability of payments related to general welfare and disaster relief.”
This applies to the payments made in seventeen states including California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.
However, the IRS notes that residents in both Illinois and New York received multiple payments, only one of which will fall under the category of disaster relief payment. The agency has provided a list of the specific special payments to which the exclusion from reporting applies.
Additionally, Alaska’s energy relief payment of $650, that was included in the 2022 Permanent Fund Dividend amount of $3,284, will not be taxed by the IRS. However, the remainder, $2,634, is subject to federal income tax as has been the case in previous years for the annual lump sum payout from the state’s oil industry fund.
The IRS notes that the determination was made “in the best interest of sound tax administration” and this is only an issue for the 2022 tax year as the pandemic emergency declaration is ending in May 2023.
Refunds of taxes paid in four states might not be taxed
The situation for residents of Georgia, Massachusetts, South Carolina and Virginia is a little more nuanced. You will not owe federal income tax on your special state payments as long as those payments were a refund of state taxes you paid. “And either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied).”