The IRS Has New Tax Rules for State Payments. What They Could Mean for You.

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The Internal Revenue Service on Friday gave the green light to taxpayers in 21 states who had been waiting for the agency to clarify the taxability of certain state payments before filing their federal tax returns. 

For the most part, taxpayers will not need to report income from special payments made by states in 2022 on their tax returns this season. This guidance came after the IRS told millions of taxpayers to hold off filing their returns until the agency determined the tax status of the payments, which constituted state-level relief and included California’s middle-class tax refund, child tax refunds in several states, and other pandemic relief payments. See here for the full list of payments, which all constitute special payments. (Remember, unemployment income is taxable on the federal level; state-level treatment varies.)

Millions of taxpayers who count on their tax refunds to pay the bills had to wait a couple of weeks after the tax season opened on Jan. 23 for guidance. “The IRS appreciates the patience of taxpayers, tax professionals, software companies and state tax administrators as the IRS and Treasury worked to resolve this unique and complex situation,” the agency said in a statement.

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. In the case of Alaska, the supplement Energy Relief Payment is not taxable, but the annual Permanent Fund Dividend remains taxable.

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The situation is a bit more complicated in Georgia, Massachusetts, South Carolina, and Virginia, which gave payments in the form of refunds of state taxes paid. In the case of these payments, the IRS said that if the recipient either claimed the standard deduction or itemized their deductions but didn’t receive a tax benefit from it, the payment is not included in income for federal tax purposes. Illinois and New York issued multiple payments, one of which was a refund of taxes that should be treated this way. 

Affected taxpayers who already filed their returns and counted these state payments as income can file a superseding tax return. That’s like an amended return, but one filed by the April 18 deadline this year that replaces the original return. To file a return, use the electronic Form 1040-X and make sure to check the box indicating it’s a superseding return.

Write to Elizabeth O’Brien at [email protected]