Days after instructing taxpayers in certain states to delay filing their 2022 federal tax returns if they received state general welfare or disaster relief payments or refunds in 2022, the IRS late on Friday clarified that those taxpayers generally will not have to report those payments on their federal tax returns.
In a news release (IR-2023-23), the IRS said that it "will not challenge the taxability of payments related to general welfare and disaster relief." The IRS notes that payments made for the promotion of the general welfare or as a disaster relief payment (for example, because of the COVID-19 pandemic) may be excludable from income under the general welfare doctrine, by which payments made under legislatively provided social benefit programs for the promotion of the general welfare are excludible from gross income, or as qualified disaster relief payments under Sec. 139.
The IRS acknowledges the challenge of determining which payments made by various states in 2022 may fall under one of those exceptions and, because the issue affects only 2022 returns, has decided that "in the best interest of sound tax administration," it will not challenge the treatment of any 2022 payment as excludable from income on an original or amended return. The IRS has provided a chart, listing the specific state payment types to which this relief applies.
Therefore, taxpayers in Alaska, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island will not have to report the listed state payments on their 2022 returns.
The IRS also said that taxpayers in Georgia, Massachusetts, South Carolina, and Virginia should not include state payments in income 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." A taxpayer may not have received a tax benefit if, for example, they itemized deductions but reached the $10,000 cap on deductibility of state and local taxes.
The news release cautions that other state payments (e.g., the annual payment of Alaska's Permanent Fund Dividend) are generally includable in income for federal income tax purposes.
— To comment on this article or to suggest an idea for another article, contact Alistair M. Nevius at Alistair.Nevius@aicpa-cima.com.