Inflation Relief Payments: What To Know for 2023 Tax Season
On the face of it, taxation should be relatively simple despite the thousands of pages of the U.S. Tax Code. Income is either taxable and nontaxable, and after adjusting for various deductions and credits, taxpayers should be able to calculate the tax they owe on it.
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But sometimes, payments are made that lie in a gray area in terms of their taxability. In these cases, further instruction from the IRS is required. This very situation happened to many American taxpayers in 2022 in the form of inflation relief payments issued by various states. Fortunately, the IRS has recently provided some guidance on this issue so that you should have all the information you need during the 2023 tax season.
Initial Guidance
The initial, somewhat unsettling guidance offered by the IRS regarding state inflation relief payments was “wait and see.” In early 2023, the IRS actually suggested that taxpayers who received any of these state payments hold off on filing their taxes and await further instruction. This was a rare move for an agency that typically encourages Americans to file their taxes as soon as possible.
Guidance issued by state taxing authorities was also initially confusing. For example, as cited by NPR, authorities in Idaho stated, “Rebates are handled exactly like regular refunds; they’re not taxable to Idaho. However, they might be taxable on the federal level.”
Coupled with the vague pronouncements from the IRS, taxpayers looking to file their returns early in the 2023 tax season were left in a holding pattern.
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Final IRS Ruling
Fortunately, the IRS didn’t take too long to review the situation and make its final ruling. On Friday, Feb. 10, the IRS announced that it would not collect taxes on state-issued tax rebates or inflation relief payments.
The rationale behind the ruling was that the IRS considers these payments to be “related to general welfare and disaster relief,” thereby making them nontaxable. Thus, these payments are both nontaxable and do not even need to be reported on federal tax forms.
Which States Issued Payments?
According to the IRS, 21 states made relief payments or tax rebates in 2022. Residents in these states do not need to pay tax on or even report the checks they received: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.
Most payments made in Georgia, Massachusetts, South Carolina and Virginia are also nontaxable. However, residents of those states will have to further qualify by either claiming the standard deduction or itemizing deductions but not receiving a tax benefit for those payments. Those payments must also be refunds of state taxes paid.
Alaska is a special case. Residents who received the state’s annual Permanent Fund Dividend must still pay tax on that income, as has always been the case. However, those who received a supplemental Energy Relief Payment will not have to report or pay tax on that distribution.
The Bottom Line
As the IRS ruling regarding inflation relief payments is brand new, there is still plenty of misinformation floating around about what taxpayers should do. However, the IRS decision announced Feb. 10 is final and supersedes previous suggestions that taxpayers wait to file their tax returns.
If you received one of these payments from your state, you can now rest assured that you won’t have to pay tax on it or even report it to the IRS. So, there is no longer any need for you to delay sending in your return.
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