Millions of Americans have received state relief payments and economic impact payments in recent years, but many are unsure whether they are required to pay taxes on this money. The IRS, in Notice 2023-56, clarified which payments count as direct financial relief exempt from federal income tax and which must be reported on a tax return. The guidance applies to payments issued in 2023 and later, including one-time refunds and disaster-related assistance distributed by state governments.
The IRS confirmed that most state relief payments and economic impact payments are exempt from federal income tax. These one-time payments were designed to give direct financial relief to eligible taxpayers affected by inflation, disasters, or pandemic-related losses.
Under the American Rescue Plan, millions of individuals and married couples filing jointly received payments that did not count as taxable income. In most cases, taxpayers do not need to pay tax or report these amounts on their tax return.
However, the exact treatment depends on the payment amounts and eligibility criteria set by each state. Taxpayers should review information from their state's department of revenue and verify their eligibility status on IRS.gov before filing their tax return.
Not all payments are fully exempt. The IRS explains that some state refunds or rebate checks may be taxable if they relate to deductions claimed on a prior year tax return. This rule often affects taxpayers who itemize deductions instead of taking the standard deduction.
If you previously deducted state or local taxes and then received a refund, that money may need to be included in your income. This so-called “tax benefit rule” applies when a taxpayer receives a financial benefit from the earlier deduction.
For example, married couples filing jointly who claimed the $10,000 SALT deduction limit may owe little or no additional tax. In contrast, other individuals who fully deducted their state taxes might need to report part of the refund. The IRS urges taxpayers to carefully review the eligibility criteria and prior filings before submitting their current income tax return.
Some payments issued by states are entirely tax-free when they provide direct financial relief for disasters or emergencies. These include money for medical costs, housing, or property losses, as long as the payment meets federal eligibility criteria and is not compensation for services.
The IRS says disaster relief payments remain excluded from income through tax year 2025, while economic impact payments and stimulus payments under the American Rescue Plan were also tax-free for eligible taxpayers. To confirm eligibility, individuals should retain any state department letters and review the updated information on IRS.gov before filing their tax return.
Eligible taxpayers should start by confirming the type of payment they received and how it was classified for federal income tax purposes. Review any letter or notice sent by mail from your state department of revenue, which often includes details about payment amounts, eligibility criteria, and how the money was applied.
Before filing your tax return, compare the information with your prior year filings to see whether you claimed deductions that might make a refund taxable. Married couples filing jointly, heads of household, and individuals with dependents should also verify that their filing status and income levels match IRS records.
If you’re unsure whether your payment qualifies as tax-free relief, check IRS Publication 525 or Notice 2023-56 for additional information. The IRS also recommends contacting a qualified tax professional to help determine whether you need to claim, report, or exclude your payment from income.
To avoid processing delays or unexpected tax bills, taxpayers should gather all documents related to their state relief payments and Economic Impact Payments before filing their income tax return. Keep records showing the payment amounts, eligibility status, and how the funds were used.
If your household received multiple payments—such as a state refund, stimulus payment, or disaster relief payment—make sure each is listed correctly when you file. The IRS advises taxpayers to double-check their address, filing status, and dependent information to prevent errors that could delay a refund.
By confirming eligibility and reviewing official guidance from IRS.gov, taxpayers can ensure their income tax filings are accurate. Taking these steps now helps avoid confusion about which payments are taxable and ensures compliance when the next tax year ends.
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