Do You Owe Federal Taxes on Relief Checks? Not If You Live in These 16 States
You probably don't need to pay federal taxes if you received state-issued inflation or tax surplus rebates this year, the Internal Revenue Service has concluded.
Last week, the IRS asked recipients to hold off on filing their tax returns until the agency could confirm whether various rebates in 21 states counted as income, based on their stated purpose.
On Friday, the IRS provided guidance that confirms most filers won't have to pay federal taxes, although there are some exceptions.
Filers do not have to pay federal taxes in 16 states: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. For a list of the specific payments applies to, the IRS has provided this chart.
For five other states it's a bit more nuanced — but again, the majority of filers in these states likely won't need to pay federal taxes on their rebates.
In Alaska, tax filers won't pay federal taxes on 2022's extra energy-relief payment. However, the yearly payment from the state's Permanent Fund Dividend derived from mostly oil revenue is still subject to federal taxes, the agency clarified.
In Georgia, Massachusetts, South Carolina and Virginia, special 2022 payments will be excluded from federal income taxes, except for filers who itemize their tax deductions and claim the the state and local tax (SALT) deduction up to $10,000, according to the IRS.
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If a filer's SALT deduction is larger than it would normally be because of a state's rebate, federal taxes would have to be paid on the difference created by the state's rebate. The exception to that is if a tax filer's total state tax deduction, minus the rebate, already exceeds the $10,000 SALT cap. In that case, no federal taxes are owed.
"A person who pays $5,000 in state taxes then receives a $1,000 rebate check is, in effect, paying $4,000 in state taxes," says Jared Walczak, vice president of state projects for the Tax Foundation. "If they are able to claim $5,000 on their federal income tax return under the SALT deduction, they are receiving an excess tax benefit."
In that case, you'd include $5,000 as part of your SALT deduction but count the $1,000 as taxable income, which is "functionally the same as only deducting $4,000," says Walczak.
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