The Taxability of State Payments: Understanding Your Obligations
The Internal Revenue Service (IRS) recently issued a statement regarding the taxability of state payments, such as unemployment benefits, under federal law. This statement serves as a reminder to individuals who have received state payments that they must report this income on their federal tax returns and pay the appropriate taxes.
It is important to understand the taxability of state payments in light of the ongoing COVID-19 pandemic, as many individuals have been relying on these payments as a source of income. The IRS statement clarifies that such payments are taxable under federal law, and that individuals must report the amount received on their federal tax returns.
In accordance with prior guidance, the statement confirms that unemployment benefits are taxable under federal law. This means that individuals who receive unemployment benefits must report the amount received on their federal tax returns and pay taxes on this income. The statement also reminds taxpayers that they may need to pay state taxes on the payments they receive, as well.
NB! Proper reporting of this income is important in order to avoid any potential issues with the IRS in the future.
This includes ensuring that the proper amount of taxes are withheld from the payments or making estimated tax payments throughout the year. The IRS provides guidance and resources on their website to help individuals understand their tax obligations and properly report this income.
Can Taxability of State Payments Differ?
It is worth noting that the taxability of state payments can vary depending on the type of payment and the individual's specific circumstances. For example, certain types of state payments, such as disability benefits, may be exempt from taxation under certain conditions. It is important for individuals to understand the tax laws and regulations that apply to their specific situation.
Also read - IRS Tax Brackets and Inflation Adjustments 2023
IRS's Guidance on State Tax Payments
The IRS has also recently provided additional information regarding the federal tax status of special payments made by certain US states in 2022. The IRS has determined that payments related to general welfare and disaster relief will not be challenged for taxability purposes.
As a result, people in Alaska, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island will not be required to report these state payments on their 2022 tax returns.
Georgia, Massachusetts, South Carolina, and Virginia residents will also not be required to report state payments if they meet specific requirements. The IRS acknowledges that the rules surrounding the treatment of state payments for federal tax purposes are complex and that the pandemic and its associated consequences have added further complexity to the situation.
In situations where the payment is a refund of state taxes paid, and the recipient claimed the standard deduction or itemized deductions but did not receive a tax benefit, the payment will not be included in income for federal tax purposes. Payments falling in this category are those made by Georgia, Massachusetts, South Carolina, and Virginia.
Payments made for the promotion of general welfare or as disaster relief payments, such as those related to the COVID-19 pandemic, may also be excludable from income for federal tax purposes. These payments will be subject to a fact-intensive inquiry that depends on several considerations, making the determination of their treatment for federal tax purposes challenging.
Payments made by states that are generally includable in income for federal tax purposes include the annual payment of Alaska's Permanent Fund Dividend and any payments provided as compensation to workers. While the rules surrounding state payments for federal tax purposes remain complex, the IRS hopes that the additional information it has provided will assist taxpayers in filing their tax returns in a timely fashion.