Statewide stimulus disbursements, tax rebates, and relief payments to combat inflation are gaining popularity. Last year, millions of individuals across 21 different states received unique state-sponsored payments. Furthermore, several states are currently issuing additional rebates and surplus tax refunds this year.
Consequently, if you have recently received or are anticipating a special state payment, you may be wondering about the tax implications. The IRS has recently provided clarification on this matter. The agency has released guidance regarding the federal tax treatment of these state “stimulus” payments and other special disbursements to individuals.
2023 State ‘Stimulus’ Check Update: IRS Provides Clarity
Clear guidance from the IRS is vital as millions of taxpayers across the United States have received unique rebates and payments, known as state “stimulus checks,” as states distribute surplus revenue to eligible residents. As reported by Kiplinger, these payments exhibit variation in terms of state, type, amount, and eligibility criteria.
In the preceding year, the IRS issued guidance specific to state payments in 2022. During that period, the agency stated that most state stimulus payments were not subject to taxation, though in certain cases, taxpayers might be required to report these payments on their federal tax returns. Additionally, the IRS recommended that some taxpayers consider amending their 2022 tax returns if they had previously reported these special state payments as income.
The IRS Provides Insights on State Rebate Payments
According to the IRS, in the majority of cases, taxpayers who receive special state payments such as one-time refunds, rebates, or other payments in 2023 typically won’t need to report these payments as part of their federal taxable income. This is particularly significant for individuals who choose the standard deduction when filing their federal tax returns, which is the choice made by most taxpayers.
The most recent guidance addresses numerous questions concerning special state payments for 2023. Here’s what you should be aware of.
However, if you itemize deductions on your federal income tax return and you happen to receive a state tax refund or a special payment, the IRS advises that you may need to include it as part of your federal income. This applies only if you previously deducted the state taxes you paid. It’s worth noting that due to the $10,000 limit imposed on itemized deductions for state income and property taxes, some taxpayers may not be required to include the state refund in their federal income.
The rules can be intricate, so if you find yourself uncertain about how to proceed, it’s advisable to seek guidance from a trusted tax professional before filing your federal return for the year 2023.
Last Year’s Delayed ‘Stimulus’ Payments Carry Over
It’s important to highlight that the IRS has issued guidance regarding a particular scenario that unfolded last year involving specific state programs. These programs disbursed payments to eligible residents, which some individuals did not receive until early 2023.
The IRS clarifies that, even if you receive your special state payment for 2022 in 2023, you can still exempt it from your federal income, adhering to the same regulations that were applicable to the 2022 state payments.
Payments from ‘General Welfare’ Programs
Furthermore, the most recent guidance from the IRS includes details concerning what the agency terms as “state general welfare programs.” Some states provide payments to individuals with the aim of enhancing the overall welfare of individuals or families facing financial challenges. The IRS categorizes this financial assistance as non-taxable income, but this applies solely when it originates from a government fund and is not in exchange for services rendered.
Please bear in mind that determining the eligibility for this exclusion can be intricate, contingent on various factors. To aid in understanding how this general welfare exclusion functions, the IRS furnishes an illustrative example.