Over the last few years millions of people got used to stimulus checks and government relief programs to bail them out of tough financial situations.
With rising inflation hitting the pocketbooks of nearly every individual and business, governments are back to handing out free money to those who qualify – generally based on income.
However, action is now being taken at the state level via additional checks or tax rebates, versus the federal level where no additional funding for stimulus or inflation relief checks was or is likely to be approved.
[2023 Update] The IRS has now provided guidelines on how residents in certain states should account for state stimulus or tax credit rebates when filing their federal IRS return. See section below for details.
Fortunately states are flush with money from prior COVID funds and higher tax collections. This has allowed many states to use some of their budget surpluses to help taxpayers deal with the impacts of higher inflation and tougher economic conditions.
Here are the states are taking action to provide economic relief current and into next year, including how you need to account for these in your tax return.
Are State Stimulus Checks Taxable and Impact on My IRS Refund?
[Updated Feb 10, 2023] Based on how state specific stimulus or inflation relief rebate tax credits/rebates were paid out last year, the IRS has now provided official guidance for accounting of these payments in federal tax returns.
Generally speaking the IRS has said that these payments won’t be taxable and do not need to be reported in 2022 IRS tax filings. But there are some exceptions among the 21 states making special payments in 2022; see sections below for the various payments. Here is the breakdown
States where 2002 special payments are excluded from federal taxes – California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.
May be excluded from 2022 federal taxes if tax payer meet additional conditions (e.g. claimed standard deduction or itemized and didn’t get tax benefit) – Alaska (partial), Georgia, Massachusetts, South Carolina and Virginia
Repayments made from state funds due to excess tax collections or state funds, like in Massachusetts and Alaska are generally subject to federal income taxes.
You can see the full IRS guidance here (IR-2023-23). Tax software providers have updated their software to account this, but you should still also check the state program site (links at the end of the article).
Are Inflation Relief or State Stimulus Checks Taxable?
The reason for the confusion was that it was unclear if those state payments should be federally taxable and if a tax payer needs to itemize deductions (vs. just taking the standard deduction like most people do) to account for it.
Because of the lack of clarity between federal and state tax rules around these payments, the IRS had recommended that taxpayers wait until additional guidance is available, which could lower or offset their expected refund.
For those who have already filed a return, they may see their return held up and refund processing to take longer than the normal schedule.
The key will be to establish if the state payments were for COVID pandemic relief (and not just free government money) which would then be treated as disaster related payments that are exempt from federal taxes.
However some tax providers like H&R Block and TurboTax had taken the position that these payments are not taxable (like prior year stimulus payments) and so clients can continue to file their returns.
California Stimulus Checks (Middle Class Tax Refund)
California’s Gov. Gavin Newsom’s office announced an inflation relief package that includes direct refunds, a.k.a inflation relief stimulus checks. This is on top of CA Golden Stimulus checks paid last year.
More than 16 million special Middle Class Tax Refund payments worth $9 billion, have been paid to residents.
The latest CA stimulus check, paid like state tax refunds were, will be based on earned income and dependents per the following tiers:
Tier 1: Tax filers with incomes up to $75,000/$150,000 (Single Filers/Joint Filers)
Tax filers in this lowest income tier will get $350 per tax filer, plus an additional $350 if tax filer has at least one dependent. There are no extra payments for multiple dependents.
So a single and joint filer in this tier with no dependents gets $350 and $700 respectively. A family of 4, with 2 kids and 2 qualifying adults will get an extra dependent payment bring their total check to $1,050.
Tier 2: Tax filers with incomes above Tier 1 levels but below $125,000/$250,000 (Single/Joint)
Filers in this tier will get $250 per qualifying tax filer, plus an additional $250 if at least one dependent. So a single filer with no dependents would get $250, versus the maximum $750 a qualifying family could get.
Tier 3: Tax filers with incomes above Tier 2 levels but below $250,000/$300,000 (Single/Joint)
Filers in this tier will get $200 per tax filer, plus an additional $200 if at least one dependent. So a single filer with would get $200, versus the maximum $600 a qualifying family with 2 adults and 2 children could get.
Any one making above Tier 3 income qualifying thresholds would not be eligible for these inflation relief stimulus tax refunds.
The 2022 inflation relief stimulus payments will be sent via direct deposit or debit card by late October, based on the residents tax filing or relevant state agency information. They will get a 1099-MISC form for tax filing purposes.
From a tax treatment perspective, the CA FTB has said the payments aren’t taxable for state-income-tax purposes but may be for federal purposes (see section above) subject to IRS determination.
Massachusetts Excess Tax Refunds (62F payment)
Taxpayers will receive refunds equal to about 14% of their tax bill for 2021, thanks to state tax law (Chapter 62F) that require excess tax revenue (above an audited cap) to be redistributed to those who paid personal income taxes in Massachusetts.
In FY22, total state tax revenue collected exceeded the allowable revenue threshold for FY22 as defined by Chapter 62F. Approximately $3 billion must to returned to tax payers.An estimated 3 million taxpayers will receive a refund equal to 14% of their 2021 Massachusetts income tax liability.
If you have already filed a 2021 tax return you should get your additional refund payment (via direct deposit or mailed as a check) by mid-December 2022.
If you file late, you should file a return (before September 15, 2023) and get paid a month after your return is approved.
You can call the 62F Refund Call Center at 877-677-9727 with questions regarding your refund.
Federal IRS vs State tax treatment
The 62F refund payments are not taxable as income at the state level. However they are taxable at the federal/IRS level if the recipient itemizes deductions on his or her federal return for Tax Year 2021.
Refund recipients who itemized on their federal returns for Tax Year 2021 will receive a Form 1099-G by the end of January to include in their 2022-2023 tax filing as income.
Colorado Cash Back Programs
Most Coloradans received a one-time $750/$1500 (single/married) tax rebate check in the mail under the Colorado Cash Back program.
You will need to have filed a state tax return (e-file for free) and will have received your check by Sep 30th, 2022. This refund will be paid based on the tax return or Property Tax/Rent/Heat Credit (PTC) Rebate application filed for 2021.
Anyone who moved to Colorado in 2022 is not eligible for this refund mechanism, as full year residency is required.
Illinois Income and Property Tax Rebates
Starting in September, residents who filed a 2021 return and earned less than $200,000 (single) or $400,000 (married) will get $50 or $100 rebates. They will also get $100 per dependent, for a maximum of three dependents ($300).
Per the Illinois Revenue page, there is an additional $300 property rebate for homeowners whose gross income does not exceed $250,000 (single) or $500,000 (joint). This applies to 2020 property taxes paid in 2021.
Also note that Monday, October 17, 2022, was the last day to submit information to receive the Illinois Income and Property Tax Rebate. No extensions were allowed after this date.
These were distributed from the week of September 12, via direct deposit or check. For tax reporting 1099-G forms were sent by the end of January 2023.
The tax rebates are exempt from state or local offsets but may be subject to offset for any federal offset obligations administered by the IRS in the TOP.
The IL tax rebate is not subject to state taxes, but if you itemize deductions for federal income tax purposes, the rebates may have an impact on your 2022 federal income tax filing.
Virginia Cost of Living Rebate
Virginia residents with a tax return filed in 2021 are eligible to receive a one-time rebate of $250 for single filers and $500 for joint filers.
Eligible tax payers will get their rebate checks (mail or direct deposit) by October 31st 2022 or within four months of their file date for late filers. They can claim it via their tax return if they don’t get paid via check.
Note that the one-time 2022 Virginia rebate will be treated like a state tax refund, so it will be taxable for taxpayers who itemize deductions on their IRS tax return, but not for taxpayers who take the standard deduction.
South Carolina Tax Rebates
Tax Rebates up to $800 were provide to residents who had a tax liability for 2021 and had filed a state tax return by Oct 17th. However this won’t help people who didn’t end up owing state taxes last year.
New York Homeowner Tax Rebate Credit
New York is providing a homeowner tax rebate credit to nearly 2.5 million residents under a new, one-year program based on their tax filings, qualifying STAR credit/exemption and income (less than $250,000).
If you qualify, you don’t need to do anything and a rebate will automatically be mailed to you by the NY Department of Taxation and Finance.
The state is also sending checks as part of a $475 million program to qualifying eligible low-income families and workers who claim the state’s child tax credit (CTC) or earned-income tax credit (EITC). The average payment is $270 and will be automatically be sent to qualifying tax payers that have filed a prior year tax return.
New Jersey ANCHOR property tax rebates
New Jersey is rolling out its Affordable New Jersey Communities for Homeowners and Renters (ANCHOR) program which expands eligibility via property tax rebates for those who owned or rented their principal residence (main home) on October 1, 2019. The following are qualifying income limits.
- Homeowners with income of $150,000 or less will receive $1,500.
- Homeowners with income of more than $150,000 and up to $250,000 will receive $1,000.
- Renters with income of $150,000 or less will receive $450.
You will need to apply by filing your ANCHOR benefit application by January 31, 2023, with direct deposit or rebates to be made by Spring of 2023.
Summary of States Who Have Sent Payments
Here is a summary of the various special state payments and tax credits in 2022:
Ironically extra stimulus or direct relief payments will likely stoke more inflation as the money will quickly be spend on buying even more goods and services.