As tax season continues, one topic on many taxpayers’ minds is the taxation of state relief payments. In response to the economic impact of the ongoing COVID-19 pandemic, several states have issued tax relief payments to their residents. These payments were designed to help ease the financial burden brought about by the pandemic and inflation.

Initially, taxpayers were uncertain about whether these state relief payments would be taxed on their federal tax returns. Even the IRS was unsure, and they asked recipients of stimulus payments to hold off on filing their federal tax returns until they could provide official guidance.

On February 10th, the IRS issued guidance regarding the taxation of these state relief payments. According to the IRS, most state tax relief payments are not considered taxable income for federal tax purposes. This means that taxpayers will not need to include these payments when calculating their taxable income for the year.

It is important to note that some states are exceptions to this general rule. The following states have taxable state relief payments: Georgia, Massachusetts, South Carolina, and Virginia. However, taxpayers in these states may still be eligible for tax-free payments depending on their individual circumstances.

It is also worth noting that the IRS guidance only applies to federal tax purposes. State tax laws may vary, and taxpayers should consult with a tax professional or their state’s tax agency for information on how state relief payments are taxed.

The states with tax-free payments are California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island. If you live in one of these states, you will not need to pay federal taxes on your state relief payments.

Overall, while there is still some variability depending on the state, the IRS guidance provides welcome clarity for taxpayers regarding the taxation of state relief payments. As always, taxpayers should contact us for advice on their specific tax situation.

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