Earlier this month, the Internal Revenue Service (IRS) abruptly advised millions of taxpayers to hold off on filing their 2022 tax return. The reason? A number of states had issued one-time tax rebates, refunds, and other special payments last year, but the IRS was not sure if some or any of these payments were taxable at the federal level.
Now the agency has clarified the situation by issuing updated guidance on the matter, stating that “taxpayers in many states will not need to report these payments on their 2022 tax returns.”
This will no doubt come as a relief to millions of taxpayers, especially those who had filed their returns before the IRS said to hold off. At the same time, the IRS guidance contains some caveats. If you received one of these state-level payments in 2022, here’s what to know:
Two types of state-level payments
The IRS has broken down the type of payments into two groups, with different states in each group.
The first group falls under people who received a refund of state taxes paid. The IRS guidance states, “If the payment is a refund of state taxes 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) the payment is not included in income for federal tax purposes.”
The IRS says payments in this category will be excluded from a taxpayer’s income “unless the recipient received a tax benefit in the year the taxes were deducted.” The states where this applies are:
- Georgia
- Massachusetts
- South Carolina
- Virginia
The second group is payments made to taxpayers for disaster relief or for general welfare. The IRS says the rules surrounding the taxability of such payments are highly complex, but concludes, “the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.”
The states where this ruling applies are:
- Alaska *
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Hawaii
- Idaho
- Illinois *
- Indiana
- Maine
- New Jersey
- New Mexico
- New York *
- Oregon
- Pennsylvania
- Rhode Island
The IRS directs people to this chart to see a list of the specific payments that apply.
However, it also notes that there are caveats attached for people who received payments in Alaska, Illinois, and New York (hence the asterisks above). In Alaska, the guidance only applies to the “supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.” And in Illinois and New York, the IRS says “Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.”
In short, even with the updated guidance, it’s best to consult a tax professional before filing your 2022 return if you have lingering questions after reading the new IRS guidance yourself—especially for those who received payments in Alaska, Illinois, or New York.
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