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State relief recipients awaiting IRS decision on potential federal tax cost

February 7, 2023

UPDATE, February 10, 2023: There's good federal tax news for residents in 21 states who last year got some financial relief from their states. The Internal Revenue Service has determined that the stimulus/tax refund payment amounts are not subject to federal tax. 

IRS building WDC cropped

Remember back in January when I listed 6 reasons why you should wait to file your federal tax return? The Internal Revenue Service has come up with a new one for taxpayers in several states.

Specifically, the IRS is telling individuals who last year received special state-issued payments to help offset higher inflation costs to wait before submitting their 2022 federal 1040s.

The reason for the delay? The IRS must decide how much, if any, tax it's going to collect on the state relief amounts.

Residents in 17 states awaiting IRS word: Officials in 21* states last year issued inflation-prompted relief checks to at least some of their residents.

The payments were distributed in Alaska, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, and Virginia.

Californians are one of the largest groups with potential federal tax liability. The California Franchise Tax Board issued more than $9 billion in MCTR relief. Most of this one-time payment amount went out last year to 16.6 million Golden State residents as either direct deposits to financial accounts or as debit cards.

Across the country, the New York Tax Department issued $475 million in additional New York State child and earned income tax payments to about 1.8 million people. Most of that money was distributed last fall.

Working on it: In most cases, the recipients were told by their state officials that the relief funds were tax-free at the state level.

Now, taxpayers filing their federal returns are learning that they might owe federal tax on the state relief payments.

Or not.

We don't know yet what, if any, Uncle Sam's possible cut of the payments will be.

The IRS says it is "working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers," but the number of states and payments and "the rules surrounding them are complex."

The IRS' goal is to come to a decision soon, possibly this week for most, if not all, the affected states.

So, if you got a special state relief payment and haven't filed your federal tax return yet, wait a bit longer.

*Updated Friday, Feb. 10, 2023, to include four states
(Alaska, Connecticut, Oregon, and Rhode Island) that were left out of the original post's list.

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TAX-SAVVY WAYS 
TO WRAP UP 2026

It’s over! With October’s extended filing deadline behind us, it is now time to focus on year-end moves to reduce your 2026 tax bill. 

You’ll find ways to do just that on the Tax Tips page (see the More Tax Posts drop-down menu at the top of the blog), as well as the separate tax tip pages for each month, notably October through December. If you’re on the Tax Tips page, you’ll find a monthly list at the end of this column. If you’re on another blog page, you can head straight to the October tips; at the bottom of that tips page you’ll find links to all the other 11 months’ collections of tax advice.

Not to spoil what you’ll find in that tax advice, but it does cover such things as tax deductions for charitable donations, investment moves that could reduce tax due, and ways to max out your tax-favored retirement savings. 

Finally, as the year winds down, things get hectic. There are lots of other things to occupy our time, like the much more fun upcoming holidays. But don’t lose sight of taxes, since timing is key. To be of use, most tax moves must be made by the end of the tax year. That’s Thursday, Dec. 31, which also is the last business day of the year. 

So that you don’t miss that final tax year deadline, also keep an eye on the countdown clock below. It will keep you on top of just how much time is left to make important, tax-saving moves. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

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