Stimulus Payments from State – Taxable?

Stimulus Checks and Taxable or Not

One issue we are seeing in our own tax offices early this tax season is trying to decide whether or not the “stimulus payments” from California, called the “Middle Class Tax Refund” (MCTR), are taxable or not taxable on 2022 tax returns.

We want to avoid a situation like what happened a couple tax seasons back where we had to go back and amend all the early season tax returns that included unemployment income–remember when the IRS came later and said up to $10,200 of unemployment wasn’t taxable? I am concerned that might happen again with these state stimulus payments.

More than 31 million Californians received this Middle Class Tax Refund payment in 2022, so it’s a very common issue.

This isn’t just a California though–numerous other states, including Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Jersey, New Mexico, New York, Pennsylvania, South Carolina and Virginia, also sent “inflation relief” or similar assistance payments in 2022.

Although California has specifically said it’s not taxable on the state return, California is sending out 1099s for these payments (if they’re $600 or over), indicating that they think it may be taxable on the federal return, or at least they want to cover their rear ends with feds 🙂

  • So the question is, are these state stimulus payments taxable in your state(s) that you normally deal with?
  • Not taxable?
  • Not taxable on the state, but yes taxable on the federal?

IRS has not announced that these payments are not taxable–and the normal rule with income is that if it’s not specifically excluded from federal tax, it’s federally taxable, right?

However, our federal tax code also allows for “general relief payment” and “disaster relief payment” exemptions, and it’s possible that these payments would fit into one or both of those categories?

Maybe IRS is preparing a press release right now to let us know that these payments are not taxable on federal returns? (A guy can hope, right?…)

  • How are YOU planning to handle these state stimulus payments?
  • Email me back your thoughts if you have a minute?

Let’s figure this out together!

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