IRS says most relief checks issued by states won’t be taxed

The Internal Revenue Service (IRS) announced on Friday that most relief checks issued by states last year are not subject to federal taxes, providing much-needed guidance as tax returns start to arrive. The IRS stated that it will not challenge the taxability of payments related to general welfare and disaster, meaning that taxpayers who received those checks won’t have to pay federal taxes on those payments. The IRS said special payments were made by 21 states in 2022.

The states where the relief checks do not have to be reported by taxpayers are California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island. This also applies to energy relief payments in Alaska that were in addition to the annual Permanent Fund Dividend, the IRS said. Taxpayers in Georgia, Massachusetts, South Carolina, and Virginia also avoid federal taxes on state payments if they meet certain requirements, the IRS added.

The IRS’ clarification was welcomed by many taxpayers who had delayed filing their returns while waiting for an answer. In California, most residents received a “middle-class tax refund” last year to help offset record-high gas prices. The IRS said it would not tax the refund.

The IRS’ stance had created confusion in some states, such as Maine, where more than 100,000 tax returns had already been filed before the IRS urged residents to delay filing their returns. Democratic Governor Janet Mills pressed for $850 pandemic relief checks last year for most Mainers, designed to conform with federal tax code to avoid being subject to federal taxes or included in federal adjusted gross income calculations.

The IRS’ clarification is expected to alleviate the confusion and concerns of taxpayers and state officials, who had been waiting for guidance on the tax status of state relief checks. The IRS said it appreciates the patience of taxpayers, tax professionals,…