Millions of Californians in 2022 got a special check from their state government to offer relief from a variety of negative economic events including inflation. Millions of taxpayers in other states got different types of special payments from their state governments as well — such as income or property tax rebates.
While those payments are likely not going to be taxed at the state level, they may be subject to income tax at the federal level. Or not. It’s still unclear.
The IRS has said it expects “to provide additional clarity for as many states and taxpayers as possible” as soon as this week.
Last year, a total of 18 states issued rebates of some kind, according to the Tax Foundation: Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Mexico, New York, Oregon, Rhode Island, South Carolina, and Virginia.
In the meantime, the agency advises filers who received special state payments to hold off on filing their returns until guidance is issued. For those who have already filed, the advice is not to file an amended return right now.
“The best course of action is to wait for additional clarification on state payments rather than calling the IRS,” the agency said.
Keep in mind, each state issued special payments for different reasons (e.g., inflation relief, surplus revenue rebates, disaster relief, etc.). And the reasons a state gave may affect whether the IRS considers a state’s special payment taxable income for federal purposes, said Annette Nellen, a California-based CPA and tax professor at San Jose State University.
Generally speaking, if a payment is issued solely for disaster relief or general welfare needs, it likely would be exempt from federal income taxes, Nellen said.
But other issues are at play, too. “Whether these rebates are taxable for federal income tax purposes depends on a number of factors, such as whether the rebates constitute pandemic relief, whether they are means-tested, and whether filers itemize. The IRS will have to determine taxability on a state-by-state basis,” said Jared Walczak, the Tax Foundation’s vice president of state projects.
Also worth noting: Many states likely capped how much of a special payment a filer could receive — in Illinois, for example, homeowners could receive a property tax rebate of up to $300, said Tom O’Saben, an enrolled agent and director of tax content for the National Association of Tax Professionals. So the amounts that potentially are subject to federal income tax may not be large.
