IRS Updates Guidance on State Tax Payments
Better late than March!
The IRS previously delayed its response on the federal taxability of various one-time state-issued rebates, stimulus payments, refunds, etc. It advised millions of taxpayers who qualified for state relief checks to hold off on filing their 2022 tax returns pending a decision on any federal tax implications. What? Many taxpayers who had already filed and/or rely on refunds were undoubtedly concerned.
In an earlier blog, National Taxpayer Advocate Erin Collins called on the IRS to clarify the ambiguity as quickly as possible so that taxpayers, practitioners and software developers will know how to report these items.
On Feb. 10, the IRS acquiesced in a statement, IR-2023-23. See the excerpts below:
“During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see … more nuanced information.
In addition, many people in Georgia, Massachusetts, South Carolina and Virginia also will not include state payments in income for federal tax purposes if they meet certain requirements. For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.”
IR-2023-23 has a listing of special state tax refunds or payments for reference.
There is an inquiry in the TXCPA Exchange on the federal taxability of Texas Travel Industry Recovery Grant (TTIR Program). IR-2023-23 does not mention the TTIR grant. You may access Exchange to offer any insight.
UPDATE 3/1/2023: The IRS stakeholder liaison has provided a response to our member's question cited above on how the IRS would treat the federal taxability of the TTIR grant:
Q. If governments use Fund payments as described in the Fund Guidance to establish a grant program to support businesses, would those funds be considered gross income taxable to a business receiving the grant under the Internal Revenue Code (Code)?
A. Yes. The receipt of a government grant by a business generally is not excluded from the business's gross income under the Code and therefore is taxable. However, a grant made by the government of a federally recognized Indian tribe to a member to expand an Indian-owned business on or near reservations is excluded from the member's gross income under the general welfare exclusion.
CARES Act Coronavirus Relief Fund frequently asked questions | Internal Revenue Service (irs.gov)
26 U.S. Code § 139 - Disaster relief payments | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu)
IRS updates frequently asked questions for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery Funds | Internal Revenue Service