The Internal Revenue Service (IRS) ruled that most taxpayers who received state stimulus payments in the 2022 tax year won’t owe taxes on those payments. The key word here is “most.”
Normally, you must report state income tax refunds on your federal return if you itemize your deductions. Many state stimulus checks, however, were either issued as disaster relief or for the general welfare, which are not taxable on the federal level. The IRS ruled that payments in 16 states fit that definition: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.
Alaskans receive a regular Permanent Fund Dividend from the state’s energy revenue, and that payment will remain taxable on the federal level. The state issued a supplemental Energy Relief Payment, which will not be subject to federal taxes.
In Georgia, Massachusetts, South Carolina and Virginia, the situation is more complex. In those states, taxpayers who took the federal standard deduction can exclude state stimulus payments from their income. Some taxpayers who itemized their payments, however, will have to report their stimulus payments as income.
Here’s why: People who itemize can deduct up to $10,000 in state taxes from their federal income taxes each year. Say you itemized your federal income taxes and claimed a $7,000 deduction for state income taxes in 2022 and received a $500 state stimulus payment. Your net payment for state taxes would be $6,500 — the $7,000 you paid in state taxes minus the $500 stimulus payment. Deducting $7,000 for state taxes from your federal income taxes would be declaring $500 too much. The IRS would say that you had overclaimed $500 for your state income tax deduction.
A complex ruling
Adding to the confusion: California had already released its 1099-MISC forms for payments of more than $600, which reported its “Middle Class Tax Refund,” as its stimulus payments were known, as taxable income to the IRS. The state may have to issue a corrected 1099-MISC form for those taxpayers. Otherwise, IRS computers could flag those returns and delay refunds for those taxpayers.
The IRS has a chart with links to state payment programs and their respective websites. If you are still worried about whether your stimulus payment is taxable, consult a tax professional.