In response to the complexity surrounding the tax treatment of special tax refunds or payments made by certain states related to the pandemic and its associated consequences in 2022, the IRS has recently announced that it will not challenge the taxability of certain payments related to general welfare and disaster relief reported or excluded on an original or amended return for federal income tax purposes.

By issuing this announcement, the IRS hopes to help taxpayers avoid confusion and ensure that they are filing their returns accurately and in a timely fashion.

The guidance categorizes the various state payments into two distinct categories, namely:

• State refund of taxes, and
• General welfare and disaster relief payments.

1. Refund of state taxes paid.

Taxpayers in:

• Georgia,
• Massachusetts
• South Carolina, and
• Virginia

will not be required to include certain state payments in their federal tax returns, according to new guidance from the IRS.

Specifically, if the state payment is a refund of state taxes paid and the recipient claimed the standard deduction or itemized deductions but did not receive a tax benefit (e.g., due to the $10,000 tax deduction limit), the payment will be excluded from income for federal tax purposes.

The IRS has clarified that payments made in 2022 by these four states falls in the category of “refund of state taxes paid” and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

2. General welfare and disaster relief payments

According to the IRS, it will not challenge the taxability of certain state payments related to general welfare and disaster relief that were distributed in 2022.

As a result, individuals in certain states, including:

• Alaska
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois
• Indiana
• Maine
• New Jersey
• New Mexico
• New York
• Oregon
• Pennsylvania, and
• Rhode Island

will not be required to report these state payments on their 2022 tax return.

However, it’s worth noting that relief for Alaska only applies to the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend, and in Illinois and New York, one of the payments was a refund of taxes, while the other was classified as a disaster relief payment.

For a complete list of specific payments to which general welfare and disaster relief payments apply, taxpayers can refer to the IRS website.

State payment program

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