Inflation Relief: IRS Clarifies Where Taxpayers Must Report State Bonus Checks

Investors are calculating profits and costs with calculators, growth and investment chart analysis, business planning and strategies to maximize sales profits.
Thapana Onphalai / Getty Images/iStockphoto

The IRS has provided guidance on how taxpayers in some states should handle special tax refunds or payments sent to households in 2022 as a way to deal with soaring inflation, ongoing COVID-19 hardships and other financial challenges.

See: What Is the Standard Deduction for People Over 65 in 2023?
Find: 3 Ways Smart People Save Money When Filing Their Taxes

In a Feb. 10 news release, the IRS said that, “in the interest of sound tax administration and other factors,” taxpayers in many states won’t need to report these payments on their 2022 federal tax returns. Special payments were made by 21 states in 2022, the agency said.

Following a review of the rebates and payments, the IRS determined that it will not challenge the taxability of payments related to general welfare and disaster relief. This determination means that people in the following states don’t need to report the state payments on their 2022 federal tax returns: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.

In Alaska, the same rules apply to supplemental Energy Relief payments received in addition to the annual Permanent Fund Dividend.

Make Your Money Work

For taxpayers in Georgia, Massachusetts, South Carolina and Virginia, state payments will not need to be included in income for federal tax purposes if they meet certain requirements. This applies if the payment was a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions, but didn’t receive a tax benefit. In other cases, state tax payments might be taxable. Some of the payments issued in Illinois and New York might also be taxable, Fortune reported.

Many Taxpayers Could Be Confused Over IRS Language

The IRS noted that rules surrounding the treatment of special state payments for federal income tax purposes are “complex” — and the guidance the agency provided is proof enough of that. Much of the wording is hard to decipher unless you’re a tax expert.

For example, the IRS release stated that it has “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 individuals who are now attempting to file their federal income tax returns, the IRS has 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.”

Make Your Money Work

If that paragraph seems confusing to you, you’re not alone. As Forbes recently noted, the IRS has a “spotty record” providing guidance when new legislation changes tax laws. For example, when the Biden administration passed the Inflation Reduction Act last year, the IRS didn’t immediately provide information on tax changes included in the bill. Instead, it only provided broad guidelines that confused many taxpayers. The same thing happened after the American Rescue Act was passed in 2021.

In a recent blog post, the Taxpayer Advocate Service wrote that the IRS “must issue guidance and provide education in a proactive and timely manner. Timely guidance is vital to taxpayers, tax professionals, and industry, and it is just good tax administration. It is key to eliminating confusion and frustration for taxpayers and tax professionals, earning the trust of the American people, and providing quality service. Sometimes, timing is everything.”

Take Our Poll: How Much of a Tax Refund Do You Expect in 2023?
IRS Tax Brackets: Here’s How Much You’ll Pay in 2023 on What You Earned in 2022

If you have questions about how special state tax payments might affect your 2022 federal tax returns, you might want to contact a tax professional. For more information on the IRS’s guidance, visit the IRS site.

More From GOBankingRates

Make Your Money Work

Share This Article:

facebook sharing button
twitter sharing button
linkedin sharing button
email sharing button
Make Your Money Work

About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
Learn More


See Today's Best
Banking Offers