IRS Statement about State Special Tax Payments/Refunds

[Lee B]

"IRS issues statement about the taxability of state payments

The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers.  There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex.

We expect to provide additional clarity for as many states and taxpayers as possible next week.

For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional.

For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS.

We also do not recommend amending a previously filed 2022 return."

[kathyc2]

Unless the TP itemized state taxes and were not limited to the 10K, I don't see how this could affect federal tax????

 

[Donnarae]

In the case of Virginia state taxes, governor Youngkin found a pocket of money and decided it was better in the taxpayers pockets. So, all taxpayers, who had any state tax liability in 2021 received free money in 2022. We were instructed to include this as income if the tax payer had itemized the year before, but that doesn’t make any sense to me because the distribution had nothing to do with itemizing or not itemizing. It seems to me like it’s simply free money. Taxes we paid in the past came back to go back in our pockets.

[JRS]

California has already issued 1099-MISC to any "refund" sent.  The letter with it states to contact your tax professor or read IRS publication 525.

[Lee B]

1 hour ago, kathyc2 said:

Unless the TP itemized state taxes and were not limited to the 10K, I don't see how this could affect federal tax????

 

1. What about taxpayers that didn't pay any state taxes due to credits etc?

2.  The IRS general rule is all income is taxable unless specifically exempted from taxation.

[kathyc2]

28 minutes ago, cbslee said:

1. What about taxpayers that didn't pay any state taxes due to credits etc?

2.  The IRS general rule is all income is taxable unless specifically exempted from taxation.

The state payments are a refund of taxes paid.   So, unless they took a deduction for it off of their federal return, not taxable. Even if TP does not pay state income tax, they are paying sales tax. If TP income was so low they have no state income or sales tax, they aren't going to be having federal tax either. 

Same general concept as credit card rebates.  If the rebate was for personal purchases, not taxable as it is deemed a reduction of payment.  If the charges are for business purposes, then taxable because the full (pre rebate) amount was deducted. 

[Lee B]

I believe that there are about 10 states that issued these payments.

The problem is that many of the state laws implementing these payments, including California, did not legally refer to these payments as State Tax Refunds

or State Tax Rebates, which is why the IRS needs to provide more guidance.

Note: Washington, which does not have a State Income Tax is calling their payments a Rebate of State and Local Sales Taxes Paid .

Film at 11 

[Gail in Virginia]

4 hours ago, Donnarae said:

In the case of Virginia state taxes, governor Youngkin found a pocket of money and decided it was better in the taxpayers pockets. So, all taxpayers, who had any state tax liability in 2021 received free money in 2022. We were instructed to include this as income if the tax payer had itemized the year before, but that doesn’t make any sense to me because the distribution had nothing to do with itemizing or not itemizing. It seems to me like it’s simply free money. Taxes we paid in the past came back to go back in our pockets.

Any state refund is taxes you previously paid coming back into your pocket.  The state is just treating this as an increase in your refund, and is sending out the usual statement for refunds including this amount.  What is interesting is that the people who had a balance due in 2022, and paid it before this "refund" was issued are getting a card saying they got this amount as a refund for 2022.  So I guess we put the entire balance they paid in as taxes paid in 2022, and then put this amount in as a refund on page 1 of the return rather than netting the amounts?  To top it off, instead of the usual post card VA sends, they have printed the postcard form, perforations and all, on 8.5 x 11 paper, and are mailing it in an envelope so i am getting calls asking what this is like i needed something to do this time of year. 

[Sara EA]

And after all the trouble just opening the notice from VA, it tells you to go to their website to get your 1099G!

[Catherine]

MA at least called these payments tax rebates, tying the payment to state taxes. If the client did not itemize, we're ignoring it. If they did, we'll check the property tax amount. For many in eastern MA, the $10K state tax maximum is more than covered by real estate taxes alone.

[TAXMAN]

Hey Gail how do we know he found in his 21 pocket and not some prior year as in 18 19 20 etc. Or even a combination of all the years.

[Gail in Virginia]

1 minute ago, TAXMAN said:

Hey Gail how do we know he found in his 21 pocket and not some prior year as in 18 19 20 etc. Or even a combination of all the years.

I guess because they had to have a tax liability in 2021 to receive this payment, and the card from the state will show that it is a refund of 2021 taxes. 

[GLJEANNE]

MN issue Covid Frontline Worker Pay, a bonus for folks who had to keep working onsite during 2020, and met certain income qualifications.  It's non-taxable for state, but taxable for fed. 

[Lee B]

"The Internal Revenue Service is cautioning taxpayers in states that offered special tax refunds or payments to wait to file their income tax returns until it's clear whether the money is taxable or not.

The warning seems to apply mainly to California taxpayers, which offered a Middle-Class Tax Refund last year to millions of residents. Other states may be affected as well, including Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Maine, New Mexico, South Carolina and Virginia, which sent rebates to taxpayers after they reported budget surpluses."

[jklcpa]

Yes, Delaware is calling ours a tax rebate refund, and was paid to anyone that filed a 2020 resident tax return regardless whether or not they continued to live in the state in 2022.

I am inclined to treat it like any other state tax refund, if they itemized for 2020, using the tax benefit rule.

[TAXMAN]

Do you think that maybe the definition between the words rebate vs refund could be the cause?

[mcbreck]

Many states issued checks to people whether they paid taxes in 2022 or not because they called it inflation relief payments. The state of California issued 1099-misc forms - not 1099-G. Spidell initially said to expect it to be federal taxable but backtracked and said to wait for the IRS to rule which they haven't yet. Illinois called it a rebate but they literally have no money so how they can afford to rebate taxes is beyond me. Most of the states paid out amounts less than the 1099 limit so they aren't required to issue forms - will the IRS pursue it if they decide it's taxable?

Talked to a guy who received his Minnesota frontline worker payment of $487. How many people do you think are going to claim that on their return since they didn't issue a tax form?

[GLJEANNE]

13 hours ago, mcbreck said:

Many states issued checks to people whether they paid taxes in 2022 or not because they called it inflation relief payments. The state of California issued 1099-misc forms - not 1099-G. Spidell initially said to expect it to be federal taxable but backtracked and said to wait for the IRS to rule which they haven't yet. Illinois called it a rebate but they literally have no money so how they can afford to rebate taxes is beyond me. Most of the states paid out amounts less than the 1099 limit so they aren't required to issue forms - will the IRS pursue it if they decide it's taxable?

Talked to a guy who received his Minnesota frontline worker payment of $487. How many people do you think are going to claim that on their return since they didn't issue a tax form?

Yeah I know, it's such a pain they didn't issue a form.  And because the qualifications were different for different groups, we have to ask pretty much everyone who worked at all in 2020.  I have a lot of healthcare workers, and a lot of low income folks, so I pretty much everything is on hold for now.

[FDNY]

How many people will hold up sending in their documents to us after reading or hearing this.  I already had 2 calls.  I hope they come out with guidance soon.  Tax practitioners don’t have time for this right now.

[Lion EA]

Issue Number:    IR-2023-23

IRS issues guidance on state tax payments to help taxpayers

WASHINGTON – The Internal Revenue Service provided details today clarifying the federal tax status involving special payments made by 21 states in 2022. 

The IRS has determined that in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns. 

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 below for 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. 

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 is aware of questions involving special tax refunds or payments made by certain states related to the pandemic and its associated consequences in 2022. A variety of state programs distributed these payments in 2022 and the rules surrounding their treatment for federal income tax purposes are complex. While in general payments made by states are includable in income for federal tax purposes, there are exceptions that would apply to many of the payments made by states in 2022.

To assist taxpayers who have received these payments file their returns in a timely fashion, the IRS is providing the additional information below.

Refund of state taxes paid

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 (for example, because the $10,000 tax deduction limit applied) the payment is not included in income for federal tax purposes.

Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

·         Georgia

·         Massachusetts

·         South Carolina

·         Virginia

General welfare and disaster relief payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment.  Determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations. 

The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

·         Alaska[1]

·         California

·         Colorado

·         Connecticut

·         Delaware

·         Florida

·         Hawaii

·         Idaho

·         Illinois[2]

·         Indiana

·         Maine

·         New Jersey

·         New Mexico

·         New York2

·         Oregon

·         Pennsylvania

·         Rhode Island

For a list of the specific payments to which this applies, please see this chart.

Other payments

Other payments that may have been made by states are generally includable in income for federal income tax purposes.  This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.

[1] Only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.

[2] Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.

[BulldogTom]

So we need to amend the returns we already filed?

I cannot believe the IRS just threw tax law out the window "in the interest of sound tax administration".   I want to rant so badly right now, but @jklcpaJudy will kick me off the platform if I do.

Tom
Longview, TX

[Lion EA]

It actually makes me less mad, because I'm still filing 2021 returns! My clients are dropping off 2022 tax information earlier than usual (usually a lot of investors waiting on brokerage statements), but I haven't gotten to any of the 2022 returns yet. A surprising statement by the IRS.

[Sara EA]

Tom, you only have to amend if you included the payments in income.  The IRS statement pretty much says that none of these payments is taxable.  I think they did the right thing for "tax administration."

[BulldogTom]

52 minutes ago, Sara EA said:

Tom, you only have to amend if you included the payments in income.  The IRS statement pretty much says that none of these payments is taxable.  I think they did the right thing for "tax administration."

Sorry Sara, I think they bailed on their responsibility to collect taxes.  Congress makes tax law, and Congress said all income is taxable unless Congress says it isn't.  The Nine Clowns in Black Gowns (otherwise known as  the Supreme Court) have affirmed that ascension to wealth is income unless Congress exempts it.   Congress did not exempt the income because a plain reading of the General Welfare Exclusion tax rules provide that you must show need in order for the claim to be made.   Governors from states that did not want their constituents driving to the polls pissed about inflation does not fit the definition of need.   The payments made by the state of CA under the name "Middle Class Tax Refund" do not meet the legal definition of a tax refund (it was not based on taxes paid) or General Welfare (recipients did not have to show need in order to qualify as required under statute).   Just because the states made the IRS job hard does not give them the right to just throw in the towel and say we are not going to do our job.   And they will get away with it because it is like complaining that the highway patrol is not stopping speeders.   

[Slippery Pencil]

It's been known almost from day one that the irs was going to issue guidance on these refunds.  Why would you file returns which include uncertainties when you know the uncertainty would be resolved in a week or two?  Then when the uncertainty is resolved in the manner opposite of the way you gambled, you complain about it.