Is Your State Tax Rebate Taxable?
Many states, 21 in fact, issued taxpayers special refunds or rebates under the umbrella of inflation assistance during 2022. Normally, the receipt of a state tax refund is considered taxable income if the taxpayer itemized in the previous year. While it is getting harder to itemize due to the increased standard deduction and the state and local tax cap, these payments have led many to wonder if they are taxable. Last week, the news was to delay filing until the IRS issued guidance and just a couple days later, on February 10, that guidance came.
It is rare to see the IRS take a position like this, but the Service essentially said it would not “challenge the taxability of payments related to general welfare and disaster relief”. The release stated that 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.” From this tax preparer and taxpayer’s perspective, after 3 long years of processing issues, changes, new programs, etc., this is very sound advice.
For states where the rebates were deemed general welfare and disaster payments, taxpayers in California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island do not need to report these payments as income on their 2022 tax return IRS noted that these types of payments are complicated and fact-specific, are only one time events, and that given the need to provide clarity and move the 2022 filing season along, the payments are will not be taxed.
Taxpayers in Georgia, South Carolina, and Virginia are also excluded from reporting, but only in limited circumstances. Refunds/rebates in these states fall in the category of a refund of state taxes paid. In these cases, they are only excluded from income if the taxpayer claimed the standard deduction or itemized their deductions and did not receive a tax benefit (for instance due to the state and local tax cap).
To further complicate the situation, Illinois and New York issued multiple payments, one of which was an income tax refund and one that was a disaster payment. For example, Illinois issued a flat amount per individual claimed on the return as a disaster payment and then issued a property tax rebate based on taxes paid.
The IRS has done what it can to simplify this process, but there are still complexities to be analyzed.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.
Comments are closed.