IRS extends payment relief in 17 states to 2023

The IRS has issued guidance (Notice 2023-56) extending relief allowing taxpayers to exclude from federal income certain payments under specific programs in 17 states. The notice also includes a robust discussion of how the IRS generally determines whether state payments should be included in income.

The new IRS guidance builds on a February release (IR-2023-23) that identified specific programs in 17 states and provided that “in the interest of sound tax administration,” the IRS would not challenge taxpayers who excluded 2022 payments under the programs from income. Notice 2023-46 acknowledges that payments under some of these programs have been received in 2023, and it expands the IRS relief to allow these spillover payments to be excluded from 2023 income. The notice provides that “taxpayers who did not receive a payment under the program in 2022 may exclude a State payment received in 2023 under the 2022 program from Federal gross income.”

Like the original release, the new guidance does not appear to be reaching a legal conclusion on the taxability of the payments. The IRS is instead providing relief in consideration of “the need to provide certainty and clarity” for what can be “a complex fact intensive inquiry” on whether a general welfare or disaster relief payment is included in income. Many states offered residents special rebates and other relief payments in response to COVID-19.

The relief only applies to the state programs specifically identified in IR-2023-23, which are: 

• Alaska: Energy Relief Payment (supplementing the Permanent Fund Dividend, which is not excludable)
• California: Middle Class Tax Refund
• Colorado: Colorado Cash Back
• Connecticut: Child Tax Rebate
• Delaware: Relief Rebate Program
• Florida: Pandemic Temporary Assistance to Needy Families
• Hawaii: Act 115 Refund
• Idaho: 2022 Tax Rebate
• Illinois: Individual Income Tax Rebate and Property Tax Rebate
• Indiana: Automatic Taxpayer Refunds #1 and #2
• Maine: Pandemic Relief Funds
• New Jersey: ITIN Holders Direct Assistance Program
• New Mexico: Multiple rebate and relief programs
• New York: Supplemental Child Credit and Supplemental Earned Income Tax Credit
• Oregon: One-time Assistance Payments
• Pennsylvania: One-Time Bonus Rebates
• Rhode Island: 2022 Child Tax Rebates

The determination of whether other state payments, rebates or refunds are included in income should be made based on existing rules, which can involve applying the qualified disaster payment rules under Section 139(b), the general welfare doctrine, or the tax benefit rule. IR-2023-23 specifically provided that payments under programs from four states, Georgia, Massachusetts, South Carolina and Virginia, are considered refunds of state taxes paid and can only be excluded from income if the taxpayer did not receive a tax benefit such as a federal deduction based on the amount refunded.

Unlike the prior release, the notice provides a lengthy discussion of how the IRS views the general determination of whether a state payment should be included in income. The notice does not itself appear to be providing any new guidance redefining these rules; it instead reads more like a description of how the IRS interprets existing standards. The notice solicits taxpayer commentary with the intent to issue actual guidance in the future.