IRS issues favorable guidance on some 2022 state payments
Includes welfare and disaster relief payments from DE, NJ, NY, and PA
Important clarifying information issued by the IRS
On February 10, 2023, the IRS published IR-2023-23, providing details on the federal income tax status of special payments made in 2022 by 22 states, including Delaware, New Jersey, New York and Pennsylvania.
This IRS announcement resolves significant uncertainty over the status of various state payments.
Taxpayers in the following states do not need to report payments related to general welfare and disaster relief on their 2022 tax returns: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island.
In addition, taxpayers in Alaska do not need to report state payments related to supplemental energy relief payment received in addition to the annual permanent fund dividend.
The following are significant excerpts from IR-2023-23:
Refund of state taxes paid
If the payment is a refund of state taxes paid, and either the recipient claimed the standard deduction, or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied), the payment is not included in income for federal tax purposes.Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.
- Georgia
- Massachusetts
- South Carolina
- Virginia
General welfare and disaster relief payments
If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex, fact intensive inquiry that depends on a number of considerations.
The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories. The complicated fact-specific nature of determining the treatment of these payments for federal tax purposes has been balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns. As a result, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration will end 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.Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.
- Alaska
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Hawaii
- Idaho
- Illinois
- Indiana
- Maine
- New Jersey
- New Mexico
- New York
- Oregon
- Pennsylvania
- Rhode Island
For a more detailed description of the specific payments applicable, please review this chart: IR-2023-23 STATE PAYMENTS.
Other payments
Other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska's Permanent Fund Dividend, and any payments from states provided as compensation to workers.
If you need additional guidance regarding how this IRS announcement may affect you, please reach out to your Herbein team member through the form below.
Article prepared by Barry D. Groebel
