You may be doing your taxes right now and most of the time the software programs or preparers will know how to handle all your income. But these last few years we had a lot of curve balls to our finances with stimulus payments and pandemic related relief payment programs from some states. Therefore, here is what you need to know.
Usually this is clearly defined in the 1040 instructions or in one of the various IRS publications. A person I know at the IRS was asked about a payment from the state of California related to excess funds from the pandemic that the state released to taxpayers. They called it the Middle Class Tax Refund. People were getting 1099-MISC with the income reported in Box 3 for Other Income. And people were confused if it was it taxable or not.
My person at the IRS told me a preparer from California called him asking was this pandemic relief payment money taxable or not. However, he could not give him a definite answer. In fact, the people above him didn’t know how to handle this as well. Finally the IRS posted information saying that this was to be determined.
Don’t you love it when these curve balls are thrown at our finances? But recently the IRS clarified this and stated in the case of California this isn’t taxable if, in the words of the IRS, “a payment is made for the promotion of the general welfare or as a disaster relief payment . . . it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment.” And relief payments related to the pandemic fit into Qualified Disaster Relief Payment.
So this can be excluded. California put a link to the IRS website and it talks about various states making these types of payments. This should hopefully answer a lot of questions about this type of oddball payments that hopefully we will never ever get again.
I don’t know about you but I would rather not go through another pandemic or some other kind of disaster where the government feels compelled to send us out checks. Remember if they are sending you a check they are doing it for a reason. People dying and losing jobs aren’t worth a few bucks from uncle Sam!
Now some of your payments like a refund of state or local taxes could be taxable if you got a tax benefit. For example, if you deducted the taxes on your federal return that had you itemized, some or all may be taxable since the amount deducted could be too high. Your software should catch that hopefully.
You also may want to check out the newsroom at the IRS for updates and further guidance on state tax payments.
