“Tax Treatment of State Stimulus Checks: IRS to Provide Guidance This Week”

The Internal Revenue Service is expected to provide more guidance this week on whether stimulus checks issued by states in 2022 will count as taxable income on federal filings.

The agency urged taxpayers who are unsure about how their state payments will be taxed to defer filing their federal taxes until guidance is released, according to the agency’s announcement.

How those payments are treated could affect residents in at least 19 states that have provided post-revenue tax refunds or relief payments to help people weather higher prices over the past year.

“The IRS is aware of issues regarding special tax refunds or payments from states in 2022,” the agency said in its press release. “We are working with state tax officials as soon as possible to provide additional information and clarity for taxpayers.”

In general, stimulus checks are usually not taxed by the government that issues them. For example, middle-class tax refund checks issued by California in 2022 are not treated as taxable income by the state, while federal government payments for economic impacts — or stimulus checks sent out during the pandemic — were not considered taxable income on federal earnings.

However, the issue becomes more complicated when taxability transcends jurisdiction.

The IRS will likely consider the purpose and nature of each state’s relief package to determine the federal tax treatment. This means, for example, that the type of relief that California granted last year could be taxed by the IRS.

“I think the design of [the law that authorized California’s] Payments make it harder for the IRS to give the tax breaks they want,” Anette Nellen, CPA and professor in San Jose State University’s Master of Science in Taxation program, wrote to Yahoo Finance. “[California’s law] added a provision that the payments are not a tax refund. There’s also a statement that the “relief” applies to more than COVID. If it had stated that it was strictly for COVID relief, there is federal law that would not have made the payments taxable.”

The IRS will likely consider the purpose and nature of each state’s relief package to determine the federal tax treatment.

Another reason California payments might be taxable at the federal level is that high-income individuals also qualified for the checks. Joint applicants earning up to $500,000 received up to $600, while individual applicants earning up to $250,000 could receive up to $400 in the program.

“Providing the payments to high-income individuals who have no financial or other need likely means that no one receiving the payments under the program will be able to receive relief under the general welfare exclusion,” Nellen said.

California’s previous two stimulus checks, issued in 2021, were not taxable for federal purposes because they were considered “disaster relief payments,” according to Gregory Kling, a chartered accountant and associate professor at the University of Southern California’s Leventhal School of Accounting.

This year, however, taxpayers should probably assume the worst when it comes to taxing aid payments, he said.

“My approach has always been to assume that government stimulus checks are taxable unless we’re told otherwise,” Kling wrote in an email to Yahoo Finance. “Tax law states that income from any source is taxable unless there is a specific provision in tax law that says it is not taxable.”

In addition to California, 18 other states issued state stimulus and rebate checks last year, including Alaska, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New Mexico, Oregon, Rhode Iceland, South Carolina and Virginia, according to a Forbes Advisor tally.

Rebecca is a reporter for Yahoo Finance.

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