Understanding the Tax Implications of State Rebate Checks in 2023

Understanding the Tax Implications of State Rebate Checks in 2023.Are you wondering whether your state rebate check for 2023 will be subject to taxation? Here’s what the IRS has to say about the taxation of ‘state stimulus checks’ and other special state rebates, and what it means for your financial situation.

State Payments in 2023

State “stimulus” checks, tax rebates, and inflation relief payments have gained popularity, with millions of people in 21 different states receiving special state payments in the previous year. Additionally, several states are continuing to distribute rebates and surplus tax refunds in the current year.

If you have received a special state payment or anticipate receiving one, you may be concerned about whether you will need to pay taxes on this money. The IRS has released guidance on the federal tax status of these state “stimulus” and other special payments made to individuals in 2023, aiming to simplify the tax implications for taxpayers.

Update on State ‘Stimulus’ Checks for 2023

Clarity from the IRS regarding state “stimulus checks” is crucial, given that millions of taxpayers across the United States have received special rebates and payments as states return surplus revenue to eligible residents. These payments vary by state in terms of type, amount, and eligibility criteria. Last year, the IRS provided guidance applicable to state payments in 2022.

At that time, the agency stated that most state stimulus payments were not taxable, although some taxpayers might need to report them on their federal returns. The IRS also suggested that some taxpayers should consider amending their 2022 tax returns if they had previously reported the special state payments as income.

IRS Guidance for 2023 Special State Payments

The latest IRS guidance addresses several questions concerning special state payments in 2023. Here’s what you need to know:

Tax Treatment for Most Taxpayers

In most cases, taxpayers who receive special state payments, such as one-time refunds, rebates, or other payments in 2023, will not need to include these payments in their income for federal tax purposes. This is particularly relevant for those who choose the standard deduction on their federal returns, which is the most common option for taxpayers.

Itemized Deductions

If you itemize deductions on your federal income tax return and receive a state tax refund or special payment, the IRS advises that you may need to include it in your federal income, but only if you deducted the state tax paid. It’s worth noting that due to the $10,000 limit on itemized deductions for state income and property taxes, some taxpayers may not need to include the state refund in their income. If you are unsure about your specific situation, it is advisable to consult a trusted tax professional before filing your 2023 federal return.

Spillover ‘Stimulus’ Payments from Last Year

The IRS has provided guidance on a specific situation that occurred last year with certain state programs. Even if you do not receive your special state payment for 2022 until 2023, you can still exclude it from your federal income by following the same rules that applied to the 2022 state payments.

‘General Welfare’ Program Payments

The latest IRS guidance also covers “state general welfare programs.” Some states offer payments to individuals to support their general well-being or that of their families. The IRS considers this money as non-taxable income, provided it comes from a governmental fund and is not compensation for services rendered.

However, determining whether payments qualify for this exclusion can be complex and depends on various factors. The IRS provides an example to illustrate how this general welfare exclusion works.

Colorado TABOR Refund

There has been recent debate about whether Colorado TABOR (Taxpayer Bill of Rights) “Cash Back” payments are exempt from federal income tax. The new IRS guidelines do not explicitly mention these payments, which essentially represent refunds of state sales taxes paid by Coloradans. Colorado state legislators and Gov. Jared Polis have requested IRS clarification on this matter to prevent TABOR refunds from being considered taxable. The IRS is also inviting comments on the federal tax treatment of special state payments, particularly those similar to TABOR refunds, with the deadline for submitting comments set for October 16, 2023.