The tax authorities had declared that the federal stimulus check, or the economic impact payments, were not to be considered taxable income nor as untaxed income. The amount was also not considered estimated financial assistance (EFA) and was ignored for every Title IV need analysis and packaging purposes.
The first stimulus checks under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that came in immediately after the pandemic shutdown that started on February 2021 was not considered taxable income.
So was the second stimulus check of December 2020 called the Coronaviru Response and Relief Supplemental Appropriations Act (CRSSA, Section 314 of the Consolidated Appropriation Act, 2021 and the third and final economic impact payment, the American Rescue Plan Act of 2021 that was signed by incoming president Joe Biden. The ED also did not consider the three rounds of federal stimulus checks to be taxable income.
The federal relief checks ended with the third round of the Economic Impact Payments under the American Rescue Plan Act of March 2021. The federal government did not issue any stimulus checks in 2022.
But some states took it upon themselves to come up with a financial solution for eligible residents. The payments given by such state administration succeeded in offsetting the effects of inflation to some extent.
Close to 20 states, most of them along the two coasts, sent out relief checks to residents. Among them were California, Colorado, Georgia, Indiana, Maine, Massachusetts, New Mexico, New York, South Carolina, and Virginia. The payments sent out to such states varied from as little as $50 to a more generous amount of up to $1,500 that matched the federal stimulus checks.
With inflation playing havoc with the personal finances of low and moderate-income households and individuals, it was normal that people looked for data on future stimulus checks that could come their way.
Are State Stimulus Checks Taxable?
With close to 20 states sending out stimulus checks in various forms to residents, it is but natural that people were worried about the tax implications of such payments. Millions of individuals and households received their payments directly into banks, in the form of paper stimulus checks, or preloaded debit cards. Other forms of payments included tax rebates, and sales tax waivers. While the federal economic impact payments were not taxable, there remains a lack of clarity on the stimulus checks sent out by various state governments in 2022.
The multiple federal stimulus checks sent out during 2020 and 2021 starting immediately after the pandemic was sent out as income tax advances accredits. As the law stipulates that tax credits are meant to reduce your income tax burden and are not considered income in the normal sense, tax filers did not have to take up the liability of paying income tax on their federal stimulus check payments.
But it is different for at least some states. Such states have given out stimulus checks to residents, but are recording the money sent out as income. The Franchise Tax Board of California, for instance, has decided to report middle-class tax refunds to the Internal Revenue Service if the amount of the stimulus checks is over $600 for any individual.
The rationale behind this decision is that the third round of the California stimulus checks was considered as being exempt from state income tax. The Golden State decided that the IRS might still consider this as income under federal taxes.
But this is not so with most other states. Colorado has hinted that the state’s Cash Back tax refund will not be part of any taxable income in the state. but there remains the possibility that a few other states might consider taking the approach of the Golden State when it comes to considering the income from the state stimulus checks.
In such cases, filers will be required to report their state stimulus checks to the tax authorities, IRS in this case, as income. It is for the IRS to decide how it will treat such income. There is a strong possibility that the IRS will decide to exempt such income from federal income tax, the same treatment it has given to federal stimulus checks, or the Economic Impact Payments, and the expanded Child Tax Credit stimulus checks.
Deducing If State Stimulus Checks Are Taxable
The easiest way to deduce if a stimulus check issued by the state in 2022 is part of income and hence taxable is to report the matter to the IRS. The other way is to keep an eye on the mail for a 1099-MISC form. These tax forms come in if you have miscellaneous earnings that are at least $600.
If a tax filer receives any one of these, it indicates that they are legally bound to report their stimulus check benefits on their income tax returns to the IRS. It is necessary to also keep an enemy in the mailbox for any form that may arrive from the IRS. A majority of such forms are postmarked by January 31, 2023. So if you as a tax filer receive one in your mailbox, you can be sure that it will come within a few weeks.
If you do so, it is necessary to be aware of the instructions to be followed for reporting all miscellaneous income when the 1040 forms are submitted in the first quarter of 2023 for the tax year 2022.
Even as the new tax return year draws to a close, state stimulus checks continue into the new year. States such as California and Colorado, that have timed their stimulus checks for the festive season in 2022 are yet to conclude their payments. Delays in getting the details of tax filers, and the speed of the postal services have ensured that it will take at least the first months of the year before California can send out the payments to all of its 23 million people who will benefit from this Middle-Class tax rebate worth up to $1,050. Some states may continue with their payments through the first quarter of 2023.
