The IRS Has New Tax Rules for State Payments. What They Could Mean for You.

The Internal Revenue Service on Friday gave the green light to taxpayers in 21 states who had been waiting for the agency to clarify the taxability of certain state payments before filing their federal tax returns. 

For the most part, taxpayers will not need to report income from special payments made by states in 2022 on their tax returns this season. This guidance came after the IRS told millions of taxpayers to hold off filing their returns until the agency determined the tax status of the payments, which constituted state-level relief and included California’s middle-class tax refund, child tax refunds in several states, and other pandemic relief payments. See here for the full list of payments, which all constitute special payments. (Remember, unemployment income is taxable on the federal level; state-level treatment varies.)