February 28, 2023

IRS Announces FY 2022 Federal Taxability Rules for State-Issued Rebates in 2022

Payments and refunds issued by states are generally considered taxable income, for both federal and state purposes. However, owing to the COVID-19 pandemic, the IRS has announced changes to the taxability of certain types of state payments for FY 2022. As you prepare your 2022 return, if you have received certain types of payments or benefits from your state, it’s important to be aware of these changes.

State payments to taxpayers that were made specifically for general welfare and disaster relief in seventeen states are specifically mentioned in an IRS statement that was issued February 10, 2022. If, when preparing your return, these qualifying payments are listed as excludable from taxable income for FY 2022, this declaration will not be challenged by the IRS. This effectively makes such state payments non-taxable income for FY 2022 year only. The specific states to which this applies are Alaska, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Note that this statement applies specifically to the taxability of these payments for federal purposes. Applicability of state taxes for these penalties are not exempted by the IRS announcement. Should you qualify for such a federal tax exemption, we strongly encourage you to contact your tax professional to determine if any state taxes may apply.

The IRS announcement also covers a more limited federal tax exclusion for Georgia, Massachusetts, South Carolina and Virginia. For these states, taxpayers may be eligible to declare certain tax refunds for FY 2002 as non-taxable income. Specifically, the exemption applies to general state tax refunds if the recipient either claimed the standard deduction or the itemized deduction, but did not receive a tax benefit for a variety of reasons. In these specific cases, the state payments are generally excluded from federal tax requirements.

Other types of payments from states to individuals that are not covered by these specific FY 2022 exceptions, such as worker compensation, are generally still considered as taxable income when preparing a federal tax return, per previous IRS guidelines.

In the wake of the COVID-19 pandemic, the IRS has continued to add rules and exceptions that may be beneficial to individual taxpayers, but are also sometimes difficult to navigate, and can raise questions and concerns for individuals preparing their return. As always, Weiss & Company LLP is ready to provide thoroughly informed tax advice that best meets your individual needs. Should you have any questions about how these changes may affect your return, we encourage you to reach out to your Weiss tax professional.

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