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IRS Not Taxing Certain State Payments, Including the California Middle Class Tax Refund

On February 10, 2023, the IRS announced that regarding special state tax payments, “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.” This includes the California Middle Class Tax Refund.

The IRS 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 returns: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island. Specified payments made by Alaska are also not going to be taxed.

In addition, some, but not all, taxpayers in Georgia, Massachusetts, South Carolina, and Virginia also will not include state payments in federal taxable income if they meet certain requirements. For these individuals, state payments will not be included 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 did not specifically state that these payments are excludable IRC §139 disaster relief payments or that they qualify for the general welfare exclusion. Rather, they stated they might qualify, but that given the complexity of the issue and the fact that this is the middle of tax season and is only relevant for the 2022 tax year, they are simply not going to challenge a taxpayer’s treatment of these payments as excludable from gross income.

The text of the announcement is available at:

This article is reproduced with permission from Spidell Publishing, Inc.

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