IRS Announces it Won't Tax State Stimulus Payments

What happened

Last week, the IRS told taxpayers who received a state stimulus check in 2022 to hold off on filing their returns while the agency worked to determine how those payments would be treated from a tax perspective. Now, the IRS has confirmed that taxpayers will generally not need to report state stimulus payments as income on their 2022 taxes.

So what

In 2022, many people struggled to keep up with inflation and rising gas prices. States with excess funds in their budgets stepped up and offered rebates, or stimulus checks, to eligible residents. 

At first, it was unclear as to whether those stimulus funds would count as taxable income, and so filers were urged to delay their tax returns until the agency could sort things out. But the IRS has released an update stating, "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."

Residents of Alaska, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island do not have to report state rebate checks on their tax returns this year. For residents of Georgia, Massachusetts, South Carolina, and Virginia, if the payment is a refund of state taxes paid and the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit from doing so, their state stimulus checks aren't subject to taxes.

Now what

While many people received a state stimulus payment in 2022, some of those payments might continue hitting recipients' bank accounts in 2023. Plus, some states might choose to uphold the practice of sharing surplus funds with residents this year, especially if inflation levels don't drop.

While the IRS has determined that these payments generally will not be taxable for the 2022 tax year, the agency might change its tune for funds received in 2023. And so those in receipt of a state rebate or stimulus check should consult a tax professional for advice on reporting that income. In fact, it's generally a good idea to seek out tax help due to nuances not only in the federal tax code, but at the state level, too.