The IRS announced Friday that relief checks issued by states last year are not subject to federal taxes, providing 11th hour guidance as tax returns begin to come in.
A week after telling recipients of the payments to delay their returns, the IRS said it will not challenge the tax on payments related to public welfare and disasters, meaning taxpayers who receive the checks will not have to pay federal taxes on the payments. All told, the IRS says special payments are being made by 21 states by 2022.
“The IRS appreciates the patience of taxpayers, tax professionals, software companies and state tax administrators as the IRS and Treasury work to resolve this unique and complex situation,” the IRS said Friday in a statement.
The states where relief checks are not required 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. . It also applies to energy relief payments in Alaska that are in addition to the annual Permanent Fund Dividend, the IRS said.
In addition, many taxpayers in Georgia, Massachusetts, South Carolina and Virginia also avoid federal taxes on state payments if they meet certain requirements, the IRS said.
In California, most residents got a “middle-class tax refund” last year, paying up to $1,050 depending on their income, filing status and whether they have children. The Democratic-controlled state legislature approved the payment to help offset record high gas prices, which peaked at $6.44 a gallon in June according to AAA.
The main question is whether the federal government will count the payments as income and require Californians to pay taxes. Many California taxpayers have delayed filing their 2022 returns while they wait for an answer. There, the IRS said it is not a tax refund.
Maine is another example of a state where the IRS attitude creates confusion. More than 100,000 tax returns had been filed as of Thursday, many of which were sent before the IRS asked residents to delay filing their returns.
Democratic Gov. Janet Mills pushed for an $850 pandemic relief check last year for most Mainers to help make ends meet as the budget surplus ballooned.
His administration designed the aid program to conform to the federal tax code so it would not be subject to federal taxes or included in federal gross income calculations, said Sharon Huntley, a spokeswoman for the Department of Administration and Financial Services.
Senate President Troy Jackson called the confusion caused by the IRS “dangerous and irresponsible.”
“Democrats and Republicans are working together to create a program that will comply with federal tax laws and deliver more than 800,000 Mainers,” the Democrat from Allagash said in a statement Friday.
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