IRS clarifies fed tax treatment of certain 2022 state tax payments

IRS says state general welfare and relief payments made to millions of taxpayers in 21 states are not subject to federal income tax. 

Late Friday, February 10, the Internal Revenue Service clarified confusion on whether general welfare and disaster relief payments made by 21 states in 2022 – many related to pandemic and inflation relief – are subject to federal income tax. With this additional guidance, tax pros and 75 million taxpayers can file their returns with clarity.  

One week prior, the agency recommended tax pros and taxpayers delay filing their federal returns until they issued guidance on the taxability of these payments. These delayed refunds for millions of taxpayers and created consternation and confusion among tax pros waiting to file their clients’ returns. 

What did the IRS say?

The IRS indicated it will not challenge the taxability of payments related to general welfare and disaster relief. This means that tax pros and individuals in the following states do not need to report these state payments on their 2022 tax return: 

• Alaska*
• California 
• Colorado 
• Connecticut 
• Delaware 
• Florida 
• Hawaii 
• Idaho 
• Illinois 
• Indiana 
• Maine 
• New Jersey 
• New Mexico 
• New York 
• Oregon 
• Pennsylvania  
• Rhode Island 

*Alaska is also included, but only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.  

Caveat for Georgia, Massachusetts, South Carolina, and Virginia

Taxpayers in  Georgia, Massachusetts, South Carolina, and Virginia should not include state payments in income 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. 

Refunds of state taxes paid 

If the state payments are refunds of state taxes paid and recipients 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) the payment is not included in income for federal tax purposes. 

Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes, unless the recipient received a tax benefit in the year the taxes were deducted. 

• Georgia 
• Massachusetts 
• South Carolina 
• Virginia 

General welfare and disaster relief payments 

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example, related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is related to the facts surrounding the payments. 

The IRS says it reviewed “the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for taxpayers filing their federal income tax returns, the agency determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.” 

Payments from the following states fall in this category, and the IRS stated it will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022. 

• Alaska¹ 
• California 
• Colorado 
• Connecticut 
• Delaware
• Florida 
• Hawaii 
• Idaho 
• Illinois²
• Indiana 
• Maine 
• New Jersey 
• New Mexico
• New York²
• Oregon 
• Pennsylvania 
• Rhode Island 

For a list of the specific payments to which this applies, see this chart. 

Other payments considered 

The agency noted that other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska's Permanent Fund Dividend and any payments from states provided as compensation to workers. 

1. Only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.
2. 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.

How to determine if an amended return is required

The IRS advises that taxpayers who filed before February 10, 2023, received state tax payments, and meet the requirements discussed above should review their returns with their tax pro to make sure they paid tax on a state refund before filing an amended return.

If an amended return is needed, taxpayers who submitted their original 2022 tax return electronically can accelerate the process of receiving their refunds by also filing their amended return electronically and may select direct deposit for any resulting refund.