IRS Confirms State Inflation Relief Payments Won't Be Taxed Federally


Following some confusion last week, the Internal Revenue Service (IRS) has confirmed that state-issued inflation relief checks in at least 20 states will not be taxed at the federal level.

When the problem first arose, the IRS issued an official statement regarding the matter. In part, it read:

The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers. There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week.
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The situation was somewhat ironic since the IRS recently issued another notice indicating that they were expecting a smooth, stress-free tax season for Americans.

Now, a new report confirms that Americans who received relief funds from their states will not face federal taxes.

In a statement, an IRS spokesperson shared, “The IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief.”

Residents California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island “do not need to report these state payments on their 2022 tax return,” according to the IRS.

Additional rules apply for relief payments in other states.

In Alaska, for example, the IRS said 2022's energy relief payment will not be taxed, but its annual payment to residents from the state’s Permanent Fund Dividend, which is primarily funded from oil revenue, will still be subject to federal income tax, as has been the case in prior years.
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Finally, in Georgia, Massachusetts, South Carolina, and Virginia residents will not owe federal income tax on state-issued checks provided that the funds were a refund from state taxes they paid, and for which they “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).”

If you have questions regarding how to properly report income of any kind on your taxes, talk to a local tax preparer.
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It is worth noting that, despite the IRS's optimism about this tax season, many taxpayers are concerned about audits due to the $80 billion in funding the agency received as a provision of the Inflation Reduction Act of 2022.

According to Michael D. Conrad, of Strategic Accounting and Tax Service in Worcester, Massachusetts, "Although Congress states that the enforcement is intended for tax cheats and high income earners, it is a concern to most taxpayers when they get the dreaded IRS notice in the mail that their tax return is being examined."

He urged tax professionals throughout the United States to be ready to provide their client with extra assistance, "As tax preparers, we need to be prepared to assist our clients with increased tax examinations."

What do you think about the IRS's decision?What do you think about the IRS's decision?

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