February 11th Update

IRS issues guidance on state tax payments to help taxpayers

IR-2023-23, Feb. 10, 2023

WASHINGTON — The Internal Revenue Service provided details today clarifying the federal tax status involving special payments made by 21 states in 2022.

The IRS has determined that in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns.

During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information.

In addition, many people in Georgia, Massachusetts, South Carolina and Virginia also will not include state payments in income for federal tax purposes if they meet certain requirements. For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.

The IRS appreciates the patience of taxpayers, tax professionals, software companies and state tax administrators as the IRS and Treasury worked to resolve this unique and complex situation.

The IRS is aware of questions involving special tax refunds or payments made by certain states related to the pandemic and its associated consequences in 2022. A variety of state programs distributed these payments in 2022 and the rules surrounding their treatment for federal income tax purposes are complex. While in general payments made by states are includable in income for federal tax purposes, there are exceptions that would apply to many of the payments made by states in 2022.

To assist taxpayers who have received these payments file their returns in a timely fashion, the IRS is providing the additional information below.

Refund of state taxes paid

If the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) the payment is not included in income for federal tax purposes.

Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

• Georgia
• Massachusetts
• South Carolina
• Virginia

General welfare and disaster relief payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations.

The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

• Alaska ^[1]
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois ^[2]
• Indiana
• Maine
• New Jersey
• New Mexico
• New York2
• Oregon
• Pennsylvania
• Rhode Island

For a list of the specific payments to which this applies, please see this chart.

Other payments

Other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.

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^[1] Only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.

^[2] Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.

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The IRS is expected to release another update the week of February 12th.

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February 3 update

IRS issues statement about the taxability of state payments

The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers.  There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week.

For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional. For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS. We also do not recommend amending a previously filed 2022 return.

With the deployment this morning (February 1st), we delivered an update to the e-file pages where the Preparer Phone Number and E-mail on the right hand side is masked. If you wish to have this information visible, select the “eye” icon.

Note:  If you DO NOT want the volunteer name to show,  we have verified with our SPEC Relationship Manager and SPEC Program Manager that you can use either First Name, Last initial or First Initial, Last Name for their username account.

 

We received messages from a couple state departments indicating they have received paper returns where the SSN’s were masked/truncated. If a taxpayer at your site needs to paper file a return (Federal or state), please make sure they receive a PDF of their return with the full SSN displayed. Generally, a preparer with a security template that has “View Full SSN” marked should print PDF’s for the taxpayer to mail in when needed. It is also possible that the taxpayer simply mailed in their masked PDF copy after the site e-filed the return instead of keeping the PDF for their records. Hard to combat against that but we are posting this message as a favor to state departments to help reduce/eliminate paper returns with masked SSN’s arriving at their door.

To review the current list of Security Templates and their definitions delivered to each site, click here.

1/2/2023 – Roughly nineteen (19) State Returns are now live! Please note the information posted below when reviewing the initial state application release. The remaining states will be released for preparation over the next couple of weeks as the various approvals are received by state departments.

Note: Initial load times may be slower than normal, but this will subside as additional state returns are created, etc.

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It is important to keep in mind when accessing 2022 state returns as they become available, some states may have been delayed in releasing final 2022 forms/instructions. As you prepare 2022 state returns in the Practice Lab, you may still see 2021 calculations and/or PDF forms. Customer Service will not be creating issues for these items until the states are closer to finalization.  As information continues to be released and finalized by the states, the Practice Lab will be updated to reflect the most recent information available.

Note: This is the same process every year and is normal behavior.

In light of recent updates regarding Form 1099-K, the IRS released an updated Fact Sheet. Click Here to view it.

Full Press Release from the Office of Governor Kay Ivey – Click Here

This is referring to the Federal American Rescue Plan Act (ARPA) and the impact on 2021 Alabama state returns for an increased federal income tax deduction.

The tax changes related to Act 2022-37 will be released live in TaxSlayer on Monday, March 28th. Alabama will begin accepting electronically filed returns with the latest schema on Tuesday, March 29th after 7:00am Central Time. From Sunday, March 27th at 9:00pm ET until Tuesday morning, we (TaxSlayer) will not send any Alabama state returns until they are ready to receive the latest schema.

Any Alabama returns electronically filed prior to this update WILL NOT need to amend. Alabama will automatically re-calculated impacted returns. For AL TP’s that filed their AL return using My Alabama Taxes or filed via paper prior to this update WILL need to amend their AL return to take advantage of this increased federal income tax deduction if applicable.

If you believe you will have AL returns at your site(s) that may be impacted by Act 2022-37, do not file them until Monday after our deployment.

3/1/22 – To accurately report the NY Excluded Workers Fund (EWF) payments reported on 1099-G, Box 6, it is a two-step process.

1. Visit the “Form 1099-G Box 1” menu in the Income section and complete the 1099-G to match the hard copy. Note: This will NOT carry Box 6 amount to Federal return (this is where step 2 comes into play), but WILL carry the NY withholdings to the NY state return.
2. After adding the 1099-G, go to Less Common Income > Other Income Not Reported Elsewhere > Select “Other Income” from the drop-down. Enter the amount from the 1099-G, Box 6 again here so that it accurately carries to the 1040 as well as flowing to the NY return.

Following the above steps will allow your site to electronically file impacted NY returns.

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2/21/22 – Box 6 input is now live for 1099-G. However, impacted returns should still be held as additional guidance will be coming soon on how to accurately report within TaxSlayer Pro to make sure everything is carrying where it needs to go.

 

 

 

 

 

 

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For 2021, NY State Department of Labor issued 1099-G’s with an amount in Box 6 for the Excluded Workers Fund (EWF). We will be updating our current 1099-G entry page to support Box 6 entries. We expect this update to be released this week. This post will be updated after it is released.