Stimulus Update: Will Relief Checks in These States Lead to Audits?

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Residents of four states must be careful not to raise a red flag. 

We now know that fighting a global pandemic involves making split-second decisions. For example, the CARES Act was signed into law on March 27, 2020. By April 11 — only 15 days later — stimulus checks tied to the CARES Act began hitting bank accounts across the country.

Perhaps it’s natural that mistakes were made in an effort to help as many people as possible, as quickly as possible.

One frustrating oversight has to do with relief checks issued by states in 2022. While legislatures sought to help those who had already depleted their emergency funds, no one seemed quite sure whether payments would be treated as income and taxed on the federal level.

States where questions may arise

Now that we’re in the midst of tax season, the IRS has provided an answer. After weeks of suggesting that payment recipients delay filing returns, the IRS now says it will not tax most stimulus funds distributed by state governments.

You’ll notice that the IRS says that “most” taxpayers won’t owe taxes. Here’s where the situation is not quite as clear cut:

GeorgiaMassachusettsSouth CarolinaVirginia

Taxpayers in these states who opt to take the standard deduction are permitted to exclude state stimulus payments from their total income. It will be as though they never received a relief check.

However, 2022 relief payments in each state were identified as “refunds of state taxes paid.” And that’s where things get sticky.

Itemized deductions and red flags

Taxpayers who itemize their deductions may raise a red flag, triggering a second look from the IRS. Here’s why: Taxpayers who itemize their deductions are permitted to deduct up to $10,000 in state taxes from their federal income taxes. Let’s say someone claimed an $8,000 deduction to cover the state income taxes they paid in 2022.

Now, imagine that the same taxpayer received a $1,000 stimulus payment. That means the taxpayer’s net payment for state taxes was $7,000 rather than $8,000 — because the $1,000 sent by the state was considered a refund on state taxes paid.

If that taxpayer claims the full $8,000, it will appear to the IRS that they overclaimed $1,000. If they claim $7,000, their tax deduction is smaller, and they will pay slightly more in taxes.

States that have it easy

These 16 states issued checks as “disaster relief” or for the general welfare of state residents, and they are not taxable on the federal level.

CaliforniaColoradoConnecticutDelawareFloridaHawaiiIdahoIllinoisIndianaMaineNew JerseyNew MexicoNew YorkOregonPennsylvaniaRhode Island

What about Alaska?

For 41 years, Alaska residents have received an annual dividend payment from the state’s Permanent Fund. With each resident receiving $3,284 in 2022, the payout was one of the largest in Alaska’s history. Of each payment, $2,622 will be taxed at the federal level, as are all annual Permanent Fund checks.

However, the remaining $662 represents a one-time energy relief payment and will not be taxed.

Millions of Americans went into 2022 in need of assistance paying for rent and groceries. While relief checks may not have rolled out in the most organized manner, at least 20 states made an attempt to make life a little easier for residents.

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