IRS updates rules on taxing stimulus checks, broadens tax-exempt status.

The Internal Revenue Service (IRS) has issued new guidance regarding the federal tax treatment ‍of various state payments and ‍refunds, expanding the tax-free treatment of stimulus check payments to those received in 2023.

The new guidelines,​ issued on Aug. 30, build on and clarify previous⁣ guidance issued on Feb. 10,‌ which said that most relief checks issued by states in 2022 didn’t need to be reported ‍on 2022 tax returns.

While the previous guidance only described‌ the taxability of pandemic relief payments,⁢ and certain other types⁣ of made in 2022, the Aug. 30 guidelines address their taxability in 2023⁢ and apply ‌a similar tax-free status to payments received this year.

“This means taxpayers who did not get a payment under the program during 2022 may exclude from federal income⁣ a state ​payment provided under the 2022 program but actually received in 2023,” the IRS said in a statement.

Besides allowing stimulus check payments to be ​tax-free in 2023, the IRS has also provided ‍a detailed description of the rules it ‌uses to determine the federal tax consequences of stimulus checks​ and other payments or refunds.

In general, the IRS said that determinations that‌ state payments qualify for exclusion from federal gross income, and therefore from federal income taxes, fall under the general welfare doctrine or because they were disaster relief payments.

The latest IRS notice also asks for public comment regarding the application of the rules described‍ in the notice, and on specific aspects of ⁢state ‍payment programs or other situations where federal income tax guidance‌ would be helpful.

Stimulus Check Tax Exemption Details

In 2022, a number of states implemented‌ programs to provide payments to residents, with many of these​ programs related to⁢ the COVID-19 pandemic and its ⁣impacts.

In a statement issued on Feb. 10, the IRS said ⁢that most relief checks issued by states in 2022 aren’t subject to federal taxes.

“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,” the agency said‍ in the statement.

All told, ‍taxpayers in ⁢17 states don’t have to report last year’s stimulus checks, while in another four states, many ​people will be able ⁤to avoid paying federal taxes on their relief payments if they meet⁤ certain ‍requirements.

Specifically, various forms of general welfare and disaster relief payments don’t have to be reported by taxpayers in 17 states: Alaska, ⁣California, Colorado, Connecticut, Delaware, Florida,‍ Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island.

In addition, four states were deemed special cases in terms of stimulus check‍ taxability because they issued relief payments in the form of refunds of state taxes paid: Georgia, Massachusetts, South Carolina, and Virginia.

Relief payments from⁤ these four states—which came in the form of tax refunds—can be excluded from‍ income for federal tax purposes, per the IRS guidelines. However, that’s only if the recipient either claimed ⁢the standard deduction or itemized their deductions, yet didn’t receive a tax benefit. That would be ‍the case if the $10,000 tax deduction limit applied, for example.

After the IRS issued the February guidance on the tax treatment of stimulus checks and other state payments, it⁢ received requests to provide guidelines ‌on ‍2023 and future payments, clarifying that the tax-free status of stimulus checks applies to those received ⁤this year.

State ​Tax Refunds and Other Payments

The latest IRS notice outlines the various types of state ⁤payments to individuals ⁢and​ delineates the corresponding⁢ federal tax treatment for each category.

For the majority of​ taxpayers who receive state tax refunds, the ⁢refund amount does not need ⁤to be reported as income for federal tax purposes. This holds true especially for taxpayers who opt for the standard deduction on their federal income tax returns.

The IRS said