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IRS Issues New Guidance on Federal Tax Impact of State Payments

S.J. Steinhardt
Published Date:
Sep 5, 2023

The IRS has issued new guidance on the federal income tax consequences of certain state payments, adding to its previous guidance from February of this year on state payments made in 2022.

The earlier guidance was issued in response to how individuals should treat state payments to certain individuals residing in 21 states on their 2022 federal income tax returns. Many of these programs were related to the various consequences of the COVID-19 pandemic, and the programs varied in terms of the types of payments, payment amounts, and eligibility criteria, CPA Practice Advisor reported

CPA Practice Advisor also reported that the previous guidance described only the taxability of payments made during 2022, and that the new guidance updates it to include payments made in 2023. The new guidance also requests comments regarding the application of the rules described in the notice, as well as specific aspects of state payment programs or additional situations on which federal income tax guidance would be helpful.

Under the new guidance, most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes. As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds.

Some of the 2022 programs included in the previous guidance provided for certain state payments under the program to be made in early 2023, CPA Advisor reported. Taxpayers who did not get a payment under the program during 2022 may exclude a state payment that was provided under the 2022 program but was actually received in 2023 from federal income.

To learn about the latest developments in state, local and federal taxation of individuals, attend the Foundation for Accounting Education's Tax and Financial Planning for Individuals Conference on Nov. 9.

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