The IRS will not tax most payments made by states in the past year
The IRS announced Friday that most of the welfare checks issued by states last year were not subject to federal taxes, issuing guidance at the 11th hour when tax returns start coming in.
A week after ordering payees to delay filing their returns, the IRS said it will not challenge the taxability of the general welfare and disaster payments, meaning taxpayers who received the checks will not have to pay federal taxes on those payments. Overall, the IRS said 21 states made special payments in 2022.
“The IRS appreciates the patience of taxpayers, tax professionals, software companies and state tax administrators as the IRS and Treasury worked to resolve this unique and complex situation,” the IRS said in a statement Friday night.
States in which taxpayers do not have to report welfare checks are California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. It also refers to additional Alaska energy payments that were in addition to the permanent fund’s annual dividend, according to the IRS.
In addition, many taxpayers in Georgia, Massachusetts, South Carolina and Virginia also avoid federal taxes on state payments if they meet certain requirements, according to the IRS.
In California, most residents received a “middle-class tax refund” last year, a payment of up to $1,050 depending on their income, filing status and whether they have children. The Democratic-controlled state Legislature approved the payments to help offset record high gas prices, which peaked at $6.44 a gallon in June, according to AAA.
A key question was whether the federal government would count those payments as income and require Californians to pay taxes on them. Many California taxpayers have delayed filing their 2022 returns while waiting for a response. On Friday, the IRS said it would not tax the refund.
Maine was another example of a state where the IRS position caused confusion. As of Thursday, more than 100,000 tax returns had already been filed, many filed before the IRS urged residents to delay filing their returns.
Democratic Gov. Janet Mills last year pushed for $850 in pandemic relief checks to help make ends meet as the budget surplus grew.
Her administration designed the assistance program under the federal tax code to avoid being subject to federal taxes or being included in calculations of federally adjusted gross income, said Sharon Huntley, a spokeswoman for the Department of Administrative and Financial Services.
Senate President Troy Jackson called the confusion caused by the IRS “harmful and irresponsible.”
“Democrats and Republicans worked together to create a program that will comply with federal tax laws and provide for more than 800,000 Mainers,” the Allagash Democrat said in a statement Friday.
Sharp reported from Portland, Maine. Associated Press writer Adam Beam in Sacramento, Calif., contributed to this report.