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IRS Announces That Special Relief Payments by States Are Not Taxable

S.J. Steinhardt
Published Date:
Feb 13, 2023

The IRS has issued guidance announcing that special payments related to general welfare and disaster relief made by several states—including New York—are not taxable. The Feb. 10 announcement came after days of confusion following the IRS's Feb. 3 advice to taxpayers in those states to delay filing their 2022 tax returns while it made this determination.

The guidance means that taxpayers in California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island and Alaska do not need to report state payments related to general welfare and disaster relief on their 2022 federal tax return. Alaska is in this group as well, but that state's payment of the Permanent Fund Dividend is still subject to federal taxation.

“In addition, many people in Georgia, Massachusetts, South Carolina and Virginia also will not include state payments in income for federal tax purposes if they meet certain requirements,” the IRS statement read. “For these individuals, state payments will not be included for federal tax purposes 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.”

The confusion started on Feb. 3, when the IRS issued a statement on the taxability of these state payments. It recommended that taxpayers wait for additional guidance on the federal tax status of these payments or refunds related to general welfare and disaster relief that were issued by certain states. National Taxpayer Advocate Erin Collins wrote on Feb. 9 that the “IRS has known for months that there is uncertainty about the tax treatment of these special state tax refunds or payments, and it has also known the answers may affect tens of millions of taxpayers. Yet to date, it has issued no specific guidance whatsoever.”

The IRS made this determination “in the interest of sound tax administration and other factors,” it stated.

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