In 2022, millions of Californians received a special check from their state government to provide relief from a number of adverse economic events, including inflation. Millions of taxpayers in other states also received a variety of special payments from their state governments — such as exemptions from income or property taxes.
Although these payments will not be taxed at the state level, they may be subject to income tax at the federal level. Or not. It is not yet clear.
The IRS has said it “expects to provide additional clarification to more states and taxpayers” as soon as this week.
Last year, according to the Tax Foundation, a total of 18 states issued some form of exemption: 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 the guidance is issued. For those who have already filed, the advice is not to file an amended return yet.
“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 (eg, inflation relief, additional revenue exemption, disaster relief, etc.). And the reasons a state gives can affect whether the IRS considers a state’s special payment taxable income for federal purposes, said Annette Nealon, a California-based CPA and tax professor at San Jose State University. .
In general, if the payment is issued solely for disaster relief or general welfare needs, it will likely be exempt from federal income tax, Neylan said.
But other issues are also at play. “Whether these exemptions are taxable for federal income tax purposes depends on a number of factors, such as whether the exemptions result in an epidemic relief, whether they are means-tested, and whether filers itemize The IRS has to determine tax eligibility on a state-by-state basis,” said Jared Walczak, the Tax Foundation’s vice president of state projects.
Also worth noting: Many states likely set limits on how much special payments a filer can receive — for example, in Illinois, homeowners can get up to $300 in property tax credits. There is, said Tom O’Sabin, an enrolled agent and director of tax content. For the National Association of Tax Professionals. Therefore, the amounts potentially subject to federal income tax may not be large.
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