IRS Issues Guidance on 2023 State Tax Payments

What You Need to Know

The notice gives updates on refunds, deductions for state income and property taxes, and spillover payments.

The Internal Revenue Service on Wednesday provided guidance on the federal tax status of refunds of state or local taxes and certain other payments made in 2023 by state or local governments to individuals.

The IRS previously provided guidance on state payments made in 2022.

Since then, the IRS said that it has “received requests for guidance regarding the Federal income tax consequences of State payments made in 2023 and future years, as well as requests that States be allowed to provide comments on the guidance.”

In 2022, the IRS explained on Wednesday, “a number of states implemented programs to provide payments to certain individuals residing in their states. Many of these programs were related, directly or indirectly, to the various consequences” of the COVID-19 pandemic, with the programs varied in terms of the types of payments, payment amounts and eligibility criteria.

The IRS points to Notice 2023-56, which describes certain types of state payments to individuals and the federal tax treatment of those payments.

The notice, issued on Wednesday, “updates the previous guidance, which only described the taxability of payments made during 2022,” the IRS said.

It also requests comments regarding the application of the rules described in the notice, “as well as specific aspects of state payment programs or additional situations on which federal income tax guidance would be helpful.”

State Tax Refunds

Most taxpayers receiving state tax refunds, the IRS said, “do not have to include the state tax refund in income for federal tax purposes.”

As a general rule, the agency relayed, “taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds.”

Spillover Payments

Some of the 2022 programs included in IRS’ previous guidance provided for certain state payments under the program to be made in early 2023, the agency said.

“To the extent that the news release provided that taxpayers can exclude the state payment received in 2022 from federal income, this treatment also applies in 2023,” the IRS said.

“This means taxpayers who did not get a payment under the program during 2022 may exclude from federal income a state payment provided under the 2022 program but actually received in 2023,” according to the agency.