IRS announces it will not tax most state inflation relief checks

by mcardinal

Lauren C. Moye, FISM News

The IRS announced yesterday that the majority of state-issued inflation relief checks from last year will not count as taxable income.

“During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief,” the IRS stated in Friday’s press release.

This decision will ease the anxiety of taxpayers who were told by the IRS not to file their tax returns a little over a week ago while the administration worked with state tax officials to clarify the rules surrounding the special tax refunds or payments.

In reviewing the “complicated fact-specific nature” of each payment, the IRS concluded that it would be in the best interest of taxpayers just to leave the exclusion of state payments unchallenged. This decision was made in part because of the expiration of the pandemic emergency declaration in May 2023, which means 2022 will be the only tax season impacted by the unusual checks.

Meanwhile, if the IRS challenged the relief as reportable income, it could have left taxpayers in limbo while waiting for the full clarification of the rules.

Yesterday’s announcement means that taxpayers in sixteen different states are now cleared to file their 2022 taxes without reporting the relief checks on their tax returns. These states are California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island.

Generally, Alaska taxpayers will also be able to leave their relief checks unreported. However, Alaska’s additional Permanent Fund Dividend program and state worker’s compensation must still be included for federal income purposes.

Finally, taxpayers in four other states – Georgia, Massachusetts, South Carolina, and Virginia – will generally be able to leave the state-issued relief unreported but must meet certain requirements.

“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 IRS warned.

Taxpayers who received a tax benefit in the year the taxes were deducted must still report refunded state taxes as income.