Last week was frustrating for both filers and tax professionals. The reason for this frustration stems from tax filings being held up, due to the federal tax statuses of certain state payments. These special state payments were made by 21 states around the country in 2022, and the IRS has finally provided some clarity on whether these payments are taxable.
IRS Determination
According to the Internal Revenue Service, taxpayers in many of these states will not have to report these payments in their 2022 tax returns. The agency said they made this decision in the interest of smoother tax administration as well as other factors.
Confusing Messages
Friday of last week, the IRS posted a message on their website telling taxpayers in certain states to hold off on filing returns until the federal status of these payments was figured out. Shortly after this announcement started circulating, frustrations started to mount for taxpayers and their hired professionals trying to assist them. Things got so chaotic in some states that a demand was prompted for clear guidelines to be made by National Taxpayer Advocate Erin Collins.
No Reporting Required in These States
In its announcement, the IRS said that it will not challenge the taxability of payments related to disaster relief and the general welfare in the following states:
- New York
- New Jersey
- New Mexico
- Maine
- Oregon
- Pennsylvania
- Rhode Island
- California
- Delaware
Alaska was also mentioned in this list, but the IRS advised us to be on the lookout for more information regarding this state. States such as Georgia, Massachusetts, South Carolina, and Virginia will also not have to include these state payments, as long as the taxpayers in these states meet certain IRS requirements.
Requirements for Certain States
Regarding the states in which taxpayers have to meet certain requirements, the IRS released a statement. “For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit,” said the IRS.
Wrap Up
The new guidance that was offered by the IRS offers some much-needed relief for tax professionals and their colleagues. The agency said in a statement that they appreciate the patience of the taxpayers, tax professionals, software companies, and state tax administrators. As last week was one of the shakier weeks this tax season, everyone hopes that this inconvenience isn’t one of many.