Will You Pay Taxes on Your State Stimulus Check?

State "stimulus" checks (also called inflation relief payments or in some cases, state tax rebates) have been a huge topic in the past year. And, after millions of people in twenty-one different states received state payments or state stimulus checks in varying amounts and under various programs, many wondered if they would have to pay taxes on that money. Well, the IRS has offered an answer. 

The IRS had initially asked taxpayers who had received the special payments, to wait to file their 2022 federal income tax returns so that the agency could decide whether the payments would be treated as taxable income. But after a review, the IRS has said that it won’t challenge the taxability of most of the special state payments.

So, what does that mean for you? That depends. While most of the state stimulus payments aren't taxable, there are some cases where you may need to report your payment on your federal return. Read on for more information.

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Is Your State Stimulus Check Taxable?

The IRS announcement covers different categories of state payments issued in 2022. First, the IRS determined that it won’t challenge special state payments that were made last year "related to general welfare and disaster relief."

States whose 2022 special payments fall into that category include California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, and Indiana. Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island also issued payments to residents last year that the IRS considers "related to general welfare and disaster relief." 

So, if you live in one of those 16 states, the IRS won’t challenge the tax treatment of the state special payments you received.

Some State Relief Payments Could Be Taxable

What About Alaska? The IRS considers some of Alaska’s special supplemental energy relief payments to residents last year to be “related to general welfare and disaster relief.” Those payments fall into the same category as other state inflation relief payments and won't be challenged by the IRS.

However, some states, (e.g., Alaska), also made other payments to residents that the IRS says are generally taxable for federal income tax purposes. As a result, the IRS will consider certain Alaska’s Permanent Fund Dividend payments, as well as any payments from other states that were provided as compensation to workers, to generally be taxable on federal returns.

Is Your Special State Refund Taxable?

If you live in a state where the special 2022 payments were "refunds of state taxes paid," the IRS will exclude those payments from income in certain circumstances. In Georgia, Massachusetts, South Carolina, and Virginia, eligible residents received special tax rebates during 2022 that fall into that category.

If you received one of those special state tax rebates and claimed the standard deduction, or if you itemized deductions but didn’t receive a tax benefit as a result, the IRS says that the special state tax rebate won’t be taxable on your 2022 federal income tax return. 

An example of “not receiving a tax benefit” as a result of itemized deductions would be if the $10,000 limit on state and local tax (SALT) deductions applied on your return, according to the IRS.

Do You Have to Report Your Stimulus Payment on Your Taxes?

Although states sending “stimulus checks,” inflation relief payments, and tax rebates, seemed common last year, the reality is that millions of taxpayers don’t normally receive widespread payments from their respective states in a single year.

So, it’s important to keep in mind that the IRS’ determination to not challenge the taxability of those payments, is unique. In its announcement, the IRS points out that the pandemic emergency declaration is set to end in May, which indicates that the IRS considers its special state payments determination to be a 2022 tax year issue.

So, what does this mean? The IRS determination means that if you are one of the millions of taxpayers who received a special state “stimulus,” inflation relief, or other rebate payment last year (during 2022), you most likely don’t have to report that income on your 2022 federal tax return.

But, as always, if you are unsure about whether any payment that you've received is taxable, seek professional assistance before you file. Also, now that the tax filing season is here, stay tuned to other key tax changes that could impact your tax return.