Millions of taxpayers who received state relief payments over the past few years may owe federal income tax on that money, according to updated IRS guidance. The agency’s new framework outlines when a tax refund or relief check must be reported on a tax return—and when it qualifies as tax-free income under federal law.
Under federal income tax law, most money a person receives—including state relief payments—is taxable unless specifically excluded. That rule applies regardless of whether a payment is referred to as a tax refund, rebate, or relief check. The IRS states that the name of a program does not determine its tax status; instead, its purpose and structure do.
The agency’s position, outlined in IRS Notice 2023-56, requires taxpayers to examine how and why a payment was issued. If the payment represents a return of overpaid state taxes, it is usually tax-free. However, if it supplements household income, offsets inflation, or covers living expenses, it may be considered gross income and must be reported on the taxpayer’s return.
The tax treatment depends on how the taxpayer filed in the prior tax year:
This rule helps ensure that taxpayers do not get a double benefit—first by deducting state taxes paid and again by excluding the refund from income tax.
The IRS also reminds filers that receiving a Form 1099-G or 1099-MISC does not automatically determine whether a refund check or relief payment is taxable. Taxpayers should review the eligibility criteria, the purpose of the payment, and official state information before filing their taxes.
Many state revenue websites now display a locked padlock icon next to secure links where individuals can download official forms or check refund status by tax year. These details help ensure that each taxpayer’s return accurately reports income and meets IRS requirements.
During the 2022 and 2023 tax years, the IRS faced confusion over how state relief payments should be reported. To ease pressure on taxpayers, the agency issued News Release IR-2023-23, announcing that it would not challenge certain refund checks and relief payments from 17 states, even when technical exclusions were unclear. The move provided short-term relief but also highlighted gaps in federal oversight.
By late 2023, IRS Notice 2023-56 replaced that temporary policy with stricter standards. The guidance directs taxpayers and tax professionals to analyze each payment by purpose, funding source, and eligibility criteria. Programs intended to offset general living costs are considered income, while tax refunds resulting from overpayments are generally exempt.
Analysts from the Tax Foundation and the Bipartisan Policy Center say this shift aligns with the agency’s push for consistent federal reporting. It also signals a broader effort to ensure uniform treatment of tax return data and reduce disputes over refund amounts and federal income tax liability.
Together, these changes mark a turning point in how state relief payments are classified—transforming a one-time administrative fix into a lasting compliance framework that affects millions of individuals and households.
Tax officials and policy experts agree that the IRS’s latest guidance on state relief payments marks a shift toward stricter enforcement and more straightforward rules. The agency is emphasizing that taxpayers must verify whether each payment qualifies as taxable income before filing their tax return.
“Relief programs vary widely, and so does their tax treatment,” said Erica York, senior economist at the Tax Foundation. “Taxpayers need to look beyond labels to understand whether these payments belong in federal gross income.”
An IRS spokesperson echoed that message, warning that many filers mistakenly assume a refund check or relief payment is tax-free.
“Receiving a Form 1099 doesn’t automatically mean the payment is taxable—and not receiving one doesn’t mean it’s tax-free,” said Eric Smith, spokesperson for the Internal Revenue Service.
These statements reflect IRS Notice 2023-56, which tells individuals to analyze each payment based on its eligibility criteria, funding source, and stated purpose. The agency says this ensures consistent and fair reporting of refund amounts and other state relief payments across all taxpayer returns.
The Bipartisan Policy Center (BPC) has urged lawmakers to simplify the classification of state relief payments for income tax purposes. Without a clearer rule, it warned, similar payments could be treated differently depending on the state or tax year.
“Without a unified federal standard, many households risk inconsistent treatment for similar payments,” the BPC said in a statement.
Analysts at the Tax Foundation also say stronger coordination between the IRS and state tax agencies would help eligible taxpayers avoid confusion during the next tax filing season. They recommend early IRS communication so individuals can confirm that refund checks, relief payments, and refund amounts are correctly reported.
For now, experts agree that taxpayers should carefully review forms, verify their filing status, and rely on official IRS information when determining whether to pay tax on state-issued relief payments.
For taxpayers who received state relief payments in recent tax years, the best way to avoid surprises is through documentation and preparation. The IRS urges everyone to keep copies of all refund checks, payment notices, and forms tied to state programs. This information helps confirm whether the refund amount must be reported on a federal tax return.
Before you file, double-check your filing status and review whether you paid state income taxes that were later refunded. This determines if a tax refund is taxable. If unsure, consult a qualified tax preparer or review official IRS guidance to ensure the correct reporting of gross income.
“The safest approach is to keep full records and rely on official IRS guidance,” said Erica York of the Tax Foundation. “Even small mistakes can lead to interest or penalties.”
Finally, individuals should confirm that the refund checks or relief payments they receive are accurately reflected on both state and federal forms before the tax filing season begins. Taking time now to organize documents, verify eligibility, and understand IRS rules can prevent delays and protect household income from avoidable tax issues.
Schedule your confidential tax relief review today
Copyright © 2025 Get Tax Relief Now
