News Alert from Lanteigne Tailored Planning: IRS Issues Guidance on State Tax Payments

The following information is provided from Lanteigne Tailored Planning with Thrivent Financial. If you have any questions or would like to follow up, visit connect.thrivent.com/lanteigne-tailored-planning or call (317) 641-5000.

The IRS has identified 21 states that made special payments to taxpayers in 2022. After a review of those special payments, the IRS has determined that taxpayers in many states will not need to report those payments on their 2022 federal income tax returns. Special payments in four of those states should be treated as refunds of state taxes paid, and taxation is determined under the general federal income tax rules for state tax refunds. Special payments in 17 states are treated as made for the promotion of the general welfare or as a disaster relief payment and are excluded from income for federal tax purposes. Illinois and New York are listed in this category but seem to have provided a mixture of payments that fell into multiple categories (see below).

If you have already filed your 2022 federal income tax return and omitted one of these special payments when it was required to be included in income, you may need to file an amended tax return and pay any additional tax due. If you included one of these special payments in income when it did not need to be included, you may need to file an amended tax return in order to get a federal income tax refund with respect to the special state tax payment.

Refund of state taxes paid

The IRS has concluded that the special payments from the following states in 2022 are treated as a refund of state taxes paid, and the appropriate analysis under the general state tax refund rules should be made.

  • Georgia
  • Massachusetts
  • South Carolina
  • Virginia

Under general rules, if the payment is a refund of state taxes paid, the payment is excluded from federal income tax unless the recipient received a tax benefit in the year the taxes were deducted on the federal income tax return. Thus, the recipient does not need to include the payment in income if the recipient claimed the standard deduction or the taxpayer itemized deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) in the year the state taxes were deducted.

General welfare and disaster relief payments

The IRS has determined that the special payments from the following states in 2022 were made for the promotion of the general welfare or as a disaster relief payment and are excluded from income for federal tax purposes.

 

 

 

 

 

State State Payment Program
Alaska* Energy Relief Payment (supplementing the Permanent Fund Dividend)
California Middle Class Tax Refund
Colorado Colorado Cash Back
Connecticut Child Tax Rebate
Delaware Relief Rebate Program
Florida Pandemic Temporary Assistance to Needy Families
Hawaii Act 115 Refund
Idaho 2022 Tax Rebate
Illinois** Individual Income Tax Rebate/Property Tax Rebate
Indiana Automatic Taxpayer Refund #1/Automatic Taxpayer Refund #2
Maine Pandemic Relief Payments
New Jersey ITIN Holders Director Assistance Program
New Mexico Multiple rebate and relief programs
New York** Supplemental Child Credit and Supplemental Earned Income Tax Credit
Oregon One-Time Assistance Payments
Pennsylvania One-Time Bonus Rebates
Rhode Island 2022 Child Tax Rebates

*Exclusion is only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.

**The IRS stated that "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." It seems that additional guidance from the IRS is needed here to identify the tax treatment of specific payments.

Other payments

The IRS adds that other payments that may have been made by states (e.g., payments from states provided as compensation to workers) are generally includable in income for federal income tax purposes.

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