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Some States May View Stimulus Checks as Reportable Credits

Posted on Apr. 7, 2020

Although Congress specified that coronavirus stimulus checks are not taxable income, a few states that allow deductions for federal taxes might make some adjustments.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) authorized $1,200 in economic impact payments for more than 90 percent of U.S. adults and an additional $500 for each child under the age of 17. The payment begins to phase out for individuals with income over $75,000; heads of household above $112,500; and married couples with income over $150,000.

The IRS stated that the payments will be treated as refundable credits and won’t be counted as taxable income for recipients. On March 30 it announced that payments would begin in the next three weeks.

“The stimulus payment is a refundable tax credit and will operate to reduce your federal tax liability,” Kari Springer, associate attorney at Gawthrop Greenwood PC, told Tax Notes April 3. “The stimulus payment is a refundable credit that would be in addition to your tax refund; it will not reduce any refund you may be entitled to receive. It is an advancement in the sense that it is an advance of the credit that will be part of your 2020 taxes.”

Many states — including California, Georgia, Illinois, Pennsylvania, and Wisconsin — and the District of Columbia have clarified that the credits won’t be treated as income for state income tax purposes.

The New York State Department of Taxation and Finance was contacted for this article but did not respond to requests for comment by press time.

Verenda Smith, deputy director of the Federation of Tax Administrators, told Tax Notes she doubts any state would tax these stimulus payments. “I can’t imagine the elected official who would allow that payment to be taxable,” she said on April 2. “For the [adjusted gross income] states — most of them — a refundable credit is not going to flow through to the state anyway. The state would have to take some extraordinary legislative action to make it taxable, and nobody will think that is a good idea, even if it were possible with few legislatures meeting right now. For those states that still start with federal taxable income, same answer.”

This wouldn’t be the first time Smith has responded to questions about the taxability of a federal stimulus. As rumors flew that some states taxed the stimulus payments from the Federal Economic Stimulus Act of 2008, Smith clarified to FactCheck.org that the stimulus would reduce the deduction some states allow for federal taxes. By reducing the deduction, some individuals would pay more in state taxes, she said.

Six states — Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon — allow some form of deduction for federal income taxes, although all differ in some ways.

Oregon provides an income tax deduction equal to an individual’s total federal tax liability, up to $6,800 for 2019. Federal income tax credits, except for the earned income tax credit, reduce the federal tax subtraction.

Rich Hoover, spokesman for the Oregon Department of Revenue, told Tax Notes on April 3 that the 2008 stimulus check was considered a refundable credit and “therefore, it potentially reduced the taxpayer’s federal tax subtraction. Reducing the taxpayer’s federal tax subtraction may increase the taxpayer’s Oregon tax.” 

Alabama also allows a deduction for federal tax liability, less federal tax credits such as the EITC and the child tax credit.

Alabama state Sen. Chris Elliott (R) said in an April 2 tweet that he plans to file legislation to exempt the federal stimulus payments from the state income tax. Similar legislation was signed into law in 2008 as Act 549, exempting the 2008 federal tax rebates from state income tax and from the calculation for the state’s federal income tax deduction.

Frank Miles, spokesperson for the Alabama Department of Revenue, said the payments could reduce the federal income tax deduction for purposes of calculating state tax liability, but that that would be true only for taxpayers who would otherwise owe tax at the federal level, regardless of the refundable credit.

“So there shouldn’t be an impact on Alabama taxable income for taxpayers who normally pay no net federal income tax after credits,” Miles said. “These are taxpayers with an income below the effective federal tax limit, those with nontaxable income, and those with credits to offset the federal tax.”

Montana’s deduction is for federal taxes paid during the year and is capped at $5,000 for individuals and $10,000 for married couples. Reductions from credits would not be factored in, according to Lee Baerlocher, tax administrator at the Montana Department of Revenue.

“As of right now, those federal stimulus payments would not decrease the amount of federal tax deduction we have on our state taxes,” Baerlocher said.

When asked for comments, the revenue departments in Missouri, Louisiana, and Iowa said they are looking into the situation.

And despite the IRS's position that the stimulus checks are not taxable income, the devil is often in the details.

“Some states piggyback on the federal definition of income, and some states have enacted that you must include the following items in income,” according to Carlton Smith, who litigated cases involving the 2008 stimulus credit for the Cardozo Tax Clinic and writes for the blog Procedurally Taxing. “However, you have to be careful in some states. Even if they piggyback, the state may make an adjustment . . . they may say federal income tax deducted must be recouped."

The stimulus payments should also not affect income calculations for benefits.

Under IRC section 6409, refunds or advance payments of a refundable credit aren't counted as income or resources when determining eligibility for benefits or assistance under any federal program or state program that uses federal funds, including supplemental security income, Social Security payments, and food stamps.

Correction, April 7, 2020:  A prior version of this article stated that the Massachusetts Department of Revenue did not respond to a request for comment. The department was not contacted for the article. 

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