The IRS announced on January 10, 2023, "if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return."
IRS issues statement about the taxability of state payments
"The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers. There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week.
For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional. For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS. We also do not recommend amending a previously filed 2022 return.
According to the Wall Street Journal, "California sent out more than 16 million special Middle Class Tax Refund payments, worth $9 billion, to help counter inflation and high gas prices last year. It is still unclear if those payments should be treated as taxable federal income, as taxpayers are starting to file their 2022 tax returns. The tax status of special state payments is just one reason many taxpayers might receive smaller tax refunds this year compared with last. more than a dozen states issued rebates and refunds in 2022, akin to the federal stimulus payments issued during the Covid pandemic. Whether the state payments are taxable for federal purposes depends on the stated purpose and federal tax law. If the payments were for Covid relief, for example, they should be exempt from federal tax as disaster-relief payments"
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Disclaimer: This article is for information purposes only and cannot be cited as precedent or relied upon in a tax dispute before the IRS.