On Aug 30, 2023, the IRS announced the following:
"In 2022, a number of states implemented programs to provide payments to certain individuals residing in their states. Many of these programs were related, directly or indirectly, to the various consequences of the Coronavirus Disease 2019 (COVID-19) pandemic, and the programs varied in terms of the types of payments, payment amounts and eligibility criteria. IR-2023-23 addressed the federal tax treatment of these 2022 payments (described below February 10, 2023).
Notice 2023-56 describes certain types of state payments to individuals and the federal tax treatment of those payments. This updates the previous guidance, which only described the taxability of payments made during 2022. "
On February 10, 2023, the IRS announced the following:
" The IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information.
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. 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."
What does this mean?
Qualifying taxpayers that received their payment in 2023 instead of 2022 may be able to exclude the state payment provided under the 2022 program as outlined above (Feb 10 guidance).
How do I know if my state refund is taxable?
The majority of taxpayers will not need to include the state tax refund in their federal income.
- Generally, taxpayers using the standard deduction on their federal income tax returns in the previous year do not include state tax refunds as income on the current year return.
- Taxpayers who itemized their deductions on their prior year federal income tax return need to include the refund in income only if they deducted the state tax paid.
- By completing the 'State or local Income tax refund' section in the program, we will determine if any of your state refund is taxable and if so, how much. (Federal Section > Income > 1099-G Box 2)
State taxes vary - check with your state to determine if your payment/refund is taxable to your state.
State general welfare programs
State payments provided by social programs to promote general welfare should not be included as income on an individual recipient's federal income tax return.
To qualify for this exclusion, the payments must:
- be paid from a governmental fund,
- be for the promotion of general welfare (that is, based on the need of the individual or family receiving such payments), and
- not represent compensation for services