Individuals who got special tax or inflation relief payments from their states last year won't have to worry about handing over a portion to the U.S. Treasury.
The Internal Revenue Service announced late Friday, Feb. 10, afternoon, that, "in the interest of sound tax administration and other factors," recipients of the payments won't have to report the amounts on their 2022 tax returns that are now being filed.
Disaster and general welfare exemptions: The IRS said that it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in 17 states do not need to report these state payments on their federal tax return.
The covered states are Alaska, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island.
Alaska added tax math: Alaska residents, however, have some differentiations to calculate. Eligible Last Frontier residents already get an annual payment from the state's Permanent Fund. This investment fund was constitutionally established in 1976 to manage the state's surplus oil and gas reserves revenues. That amount has always been federally taxable.
The Alaska Permanent Fund dividend for 2022 was $3,284 per person. However, $662 of that amount was a special Energy Relief Payment added to the Permanent Fund payout. Alaskans will owe tax on last year's $2,622 regular fund dividend amount, but not on the $662 supplemental payment.
The IRS has posted a special State Payments web page that lists the 17 affected state relief payouts and links to the states' online sources of additional information. That page earns this weekend's Saturday Shout Out.
Certain state refunds, too: A handful of states issued their residents special, one-time stimulus relief amounts last year. These payments were characterized as automatic tax refunds or rebates to help them weather tough economic times.
The IRS says that these payments in four states — Georgia, Massachusetts, South Carolina, and Virginia — also will be federally tax-free.
The IRS says that if the state tax refunds last year did not provide the taxpayers with federal tax benefit, for example, because the $10,000 state and local taxes itemized deduction limit applied, the payment is not included in income for federal tax purposes.
If you live in one of these 21 states and already filed your federal return and counted your state stimulus/rebate/refund as taxable income, you'll need to look into amending that filing, especially if it will lower what you owe Uncle Sam. But don't submit that 1040-X until the IRS has processed your original return.
As always, if you have questions about your special state tax payment and any federal tax implications, check with your tax professional. If you use tax preparation software, be sure to update the programs to ensure the latest relief payment information is included before you file your return.
You also might find these items of interest:
- State tax department online links
- State tax law 2023 changes, outlook for more
- State relief recipients awaiting IRS decision on potential federal tax cost