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Disaster and welfare payments are generally not taxable, and the I.R.S. said it determined that payments in 17 states met that definition — and that taxpayers there wouldn’t need to report the payments. Sixteen of those states are California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. (The agency provided a chart that linked to the state payments that will not be taxable.)
In the 17th, Alaska, dividend payments that are regularly made to residents generally are taxable, but the state’s supplemental energy relief payment will not be.
The situation is a little trickier for taxpayers in Georgia, Massachusetts, South Carolina and Virginia. Taxpayers in those four states who claim the standard deduction will not need to report the state payments as income, but taxpayers who itemize will — if the payment provides an extra tax benefit.
How would a taxpayer get an added benefit? People who itemize receive a federal deduction for taxes paid to state and local governments (including property taxes), also known as the SALT deduction, which is capped at $10,000 annually.
If a taxpayer owed $5,000 in state taxes but received a $500 state refund, that would mean the net payment to the government was only $4,500. But the taxpayer would have reported $5,000 to the federal government for the SALT deduction, which would be overclaiming, explained Jared Walczak, vice president of state projects at the Tax Foundation.
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