IRS: Most One-Time Massachusetts Refunds Won’t Count Toward Income

By Chris Lisinski

Many, but not necessarily all, Massachusetts taxpayers will not need to count one-time state tax rebates they received last year as income when they file federal tax returns, the Internal Revenue Service said.

A week after announcing it was reviewing the taxability of one-time payments made in several states, the IRS said Friday evening that it determined Massachusetts, Georgia, South Carolina and Virginia will all fall into the same category excluding most refunds from counting toward income.

“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,” the IRS said about Massachusetts and those three other states.

Rebate payments made by state government to taxpayers in 2022 “will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted,” the IRS said.

Tax revenues in Massachusetts blew past expectations last year, triggering a tax cap law known as Chapter 62F that required state government to return nearly $3 billion to taxpayers in proportion to how much income tax they owed.

The Baker administration began sending out rebates via checks and direct deposits in November.

In its announcement last week — when many Bay Staters and Americans in other states were either preparing their annual tax returns or had already filed them — the IRS suggested taxpayers wait for additional guidance.

Many other states not including Massachusetts that sent out payments are also affected by the IRS’s Friday guidance, which said general welfare and disaster relief payments made “may be excludable from income for federal tax purposes.”

“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,” the IRS wrote.