n-23-56.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Federal Income Tax Consequences of Certain State Payments

Notice 2023-56

SECTION 1. PURPOSE
This notice describes the rules that the Internal Revenue Service (IRS) applies in
determining the Federal income tax consequences of refunds of State or local taxes and
certain other payments made by State or local governments (States) to individuals
(State payments) and includes examples illustrating the application of these rules. This
notice also describes the applicable Federal information reporting requirements.
Section 5 of this notice requests comments, including comments on the application of
the rules described in this notice.
SECTION 2. BACKGROUND
In 2022, a number of States implemented programs to provide State payments to
certain individuals residing in their States. Many of these programs were related,
directly or indirectly, to the various consequences of the Coronavirus Disease 2019
(COVID-19) pandemic, and the programs varied in terms of the types of payments,
payment amounts, and eligibility criteria.
In response to numerous requests for guidance on how individuals should treat
these payments on their 2022 Federal income tax returns, on February 10, 2023, the

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IRS issued IRS News Release IR-2023-23
1
to provide certainty for the 2023 Federal
income tax filing season. After noting that determining whether State payments qualify
for the exclusion from Federal gross income under the general welfare doctrine or as
disaster relief payments is a complex and fact-intensive inquiry that depends on a
number of considerations, the News Release stated as follows:
The IRS has reviewed the types of payments made by various states in 2022 that
may fall in these categories and given the complicated fact-specific nature of
determining the treatment of these payments for federal tax purposes balanced
against the need to provide certainty and clarity for individuals who are now
attempting to file their federal income tax returns, the IRS has determined that in
the best interest of sound tax administration and given the fact that the pandemic
emergency declaration is ending in May, 2023 making this an issue only for the
2022 tax year, if a taxpayer does not include the amount of one of these
payments in its 2022 income for federal income tax purposes, the IRS will not
challenge the treatment of the 2022 payment as excludable from income on an
original or amended return.

The News Release identified 2022 payment programs in 17 States that qualified for this
treatment.
As the News Release made clear, the guidance in the News Release applied only for
payments made in 2022. The IRS has received requests for guidance regarding the
Federal income tax consequences of State payments made in 2023 and future years,
as well as requests that States be allowed to provide comments on the guidance. This
notice is issued in response to these requests.
SECTION 3. SUMMARY OF APPLICABLE FEDERAL INCOME TAX LAW
.01 Gross Income. Section 61(a) of the Internal Revenue Code (Code)
2
provides
that, except as otherwise provided in subtitle A of the Code, gross income for Federal

1
Available at https://www.irs.gov/newsroom/irs-issues-guidance-on-state-tax-payments-to -help-
taxpayers.
2
Unless otherwise specified, all “section” or “§” references are to sections of the Code or to the Income
Tax Regulations (26 CFR part 1).

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income tax purposes “means all income from whatever source derived” (Federal gross
income). See also § 1.61-1(a). The U.S. Supreme Court has held that Federal gross
income includes any “undeniable accession to wealth, clearly realized, over which a
taxpayer has complete dominion.” Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 431 (1955), 1955-1 C.B. 207. State payments are subject to this general rule
unless an exception applies to exclude such amounts from Federal gross income.
Relevant exceptions include certain refunds of previously paid State taxes (State tax
refunds), certain payments subject to the general welfare exclusion, and certain disaster
relief payments (including certain payments made in connection with the COVID-19
pandemic).
.02 State Tax Refunds. In determining whether a State payment constitutes a State
tax refund, as opposed to some other type of State payment, the particular label given
to the payment under State law is not controlling for Federal tax purposes. Instead,
Federal tax law looks to the substance of the payment to determine its purpose and
Federal income tax characterization. See, e.g., Morgan v. Commissioner, 309 U.S. 78,
81 (1940); Maines v. Commissioner, 144 T.C. 123, 132 (2015). In Maines, the U.S. Tax
Court considered whether payments referred to by the State as refunds for
overpayment of State taxes were properly viewed as refunds for Federal income tax
purposes. The payments in question related to three different types of refundable State
income tax credits. The court held that where the refundable credit amount was limited
to State taxes actually paid by the taxpayer, as in the case of one of the credits, the
payments constituted refunds for Federal income tax purposes. In contrast, where the
credit amount was not so limited, the court concluded that the payment was not in

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substance a refund for overpayment of State taxes and was therefore includable in
Federal gross income.
State payments that are properly treated as State tax refunds generally are not
includible in the recipient’s Federal gross income because, as the return of an
overpayment of the recipient’s State tax liability, these refunds are not an accession to
wealth. See Rev. Rul. 70-86, 1970-1 C.B. 23 (holding that a refund by the State of real
property taxes previously paid by an individual is a recovery of those taxes and is
generally not includible in Federal gross income). However, certain State payments that
are properly treated as State tax refunds may result in Federal gross income due to the
application of the “tax benefit rule.” See § 111; see also Rev. Rul. 2019-11, 2019-17
I.R.B. 1041; Rev. Rul. 93-75, 1993-2 C.B. 63. The tax benefit rule generally requires a
taxpayer to include in Federal gross income an amount recovered during a taxable year
that the taxpayer deducted for Federal income tax purposes in a prior taxable year to
the extent the Federal income tax deduction reduced the taxpayer’s Federal income tax
liability in the prior taxable year. Thus, an individual who receives a State tax refund for
a prior year tax payment that the individual did not previously deduct for Federal income
tax purposes
3
is not required to include the State tax refund in Federal gross income
because it is simply a reduction in the individual’s prior year State tax liability, with no
corresponding Federal income tax benefit. Generally, if an individual deducted a
payment of State taxes in a prior taxable year for Federal income tax purposes that
gives rise to a State tax refund in any subsequent taxable year, then the State tax

3
Section 164(a) generally allows a Federal income tax deduction for certain “State and local taxes” (as
well as certain other taxes) for the taxable year within which paid or accrued.

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refund is included in the individual’s Federal gross income during the taxable year in
which the State tax refund is received to the extent that the Federal income tax
deduction in the prior taxable year reduced the individual’s Federal income tax liability in
the prior taxable year.
For most individuals, State tax refunds will not be includible in Federal gross income.
For example, individuals who claimed the standard deduction (as most individuals do)
will not include State tax refunds in Federal gross income because they would not have
previously deducted on their Federal income tax returns the refunded amount of State
taxes paid. Individuals who itemized deductions and deducted for Federal income tax
purposes the amounts of any State taxes paid, however, generally are required to
include the State tax refunds in gross income on their Federal income tax returns to the
extent that they received a Federal income tax benefit from the prior Federal income tax
deductions.
4

.03 General Welfare Exclusion.
Despite the general rule that Federal gross income
includes all income from whatever source derived, payments made to, or on behalf of,
individuals by governmental units under legislatively provided social benefit programs
for the promotion of the general welfare are not includible in an individual recipient’s
Federal gross income (general welfare exclusion). See, e.g., Rev. Rul. 78-170, 1978-1
C.B. 24 (concluding that amounts paid under the laws of the State of Ohio to low-
income elderly and disabled persons to help alleviate their cost of winter energy

4
Section 164(b)(6), as added by § 11042(a) of Public Law 115-97, 131 Stat. 2054 (December 22, 2017),
commonly referred to as the Tax Cuts and Jobs Act (TCJA), limits an individual’s deduction under
§ 164(a) (SALT deduction limitation) to $10,000 ($5,000 in the case of a married individual filing a
separate return) for the aggregate amount of certain “State and local taxes” paid during the calendar year.
This SALT deduction limitation applies to taxable years beginning after December 31, 2017, and before
January 1, 2026.

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consumption are made for the promotion of general welfare, and are not includible in
the recipients’ gross income for Federal income tax purposes); see also Rev. Rul. 76-
395, 1976-2 C.B. 16 (applying the general welfare exclusion to home rehabilitation
grants to low-income families to correct substandard conditions).
To qualify for the general welfare exclusion, State payments must (1) be paid from a
governmental fund, (2) be for the promotion of general welfare (that is, based on the
need of the individual or family receiving such payments), and (3) not represent
compensation for services absent a specific Federal income tax exclusion. See Notice
2003-18, 2003-14 I.R.B. 699, and Rev. Rul. 76-229, 1976-2 C.B. 16.
Payments that are based on some criteria other than individual or family need do not
qualify for the general welfare exclusion. Compare Rev. Rul. 76-395, 1976-2 C.B. 16
(home rehabilitation grants received by low-income homeowners residing in a defined
area of a city under the city's community development program funded under the
Housing and Community Development Act of 1974 are in the nature of general welfare
and are not includible in their gross income) with Rev. Rul. 76-131, 1976-1 C.B. 16
(payments made by the State of Alaska to individuals at least 65 years of age who have
maintained an Alaska domicile for at least 25 years to encourage them to continue their
residence in the State did not qualify under the general welfare exclusion because the
payments were made to residents regardless of financial status, health, educational
background, or employment status).
.04 Disaster Relief. Section 139(a) provides that Federal gross income does not
include any amount received by an individual as a qualified disaster relief payment.
Section 139(b)(4) defines a “qualified disaster relief payment” to include, among other

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things, any amount paid to, or for the benefit of, an individual if such amount is paid by a
Federal, State, or local government, or agency or instrumentality thereof, in connection
with a qualified disaster in order to promote the general welfare.
5
Under § 139(c)(2), a
qualified disaster includes a Federally declared disaster as “defined by section
165(i)(5)(A).” Section 165(i)(5)(A) defines a Federally declared disaster as “any disaster
subsequently determined by the President of the United States to warrant assistance by
the Federal Government under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act.”
On March 13, 2020, the President declared that the novel COVID-19 outbreak in the
United States constituted a national emergency under the National Emergencies Act (50
U.S.C. 1601 et seq.).
6
On that same day, the President determined that the COVID-19
pandemic was of sufficient severity and magnitude to warrant an emergency declaration
under § 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act
(42 U.S.C. 5121-5207).
7
Because the President determined that the COVID-19
pandemic warranted assistance by the Federal Government under the Stafford Act, on
March 13, 2020, the COVID-19 pandemic was also a “Federally declared disaster”

5
This notice does not address, and no inference is intended with respect to, the Federal income tax
treatment of Indian general welfare benefits provided pursuant to § 139E. The Treasury Department and
the IRS are actively working to develop proposed regulations under § 139E in coordination with the
Department of the Treasury Tribal Advisory Committee established pursuant to § 3(a) of the Tribal
General Welfare Exclusion Act of 2014, Public Law 113-168, 128 Stat. 1883 (2014). Those proposed
regulations will be the subject of future Tribal Consultation pursuant to Executive Order 13175, President
Biden’s Presidential Memorandum for Tribal Consultation and Strengthening Nation to Nation
Relationships, and the Treasury Department’s Action Plan for Tribal Consultation and Collaboration.
6
Proclamation 9994 of March 13, 2020, Declaring a National Emergency Concerning the Novel
Coronavirus Disease (COVID-19) Outbreak, 85 Fed. Reg. 15337 (March 18, 2020), available at
https://www.federalregister.gov/documents/2020/03/18/2020-05794/declaring-a-national-emergency-
concerning-the-novel-coronavirus-disease-covid-19-outbreak.
7
Letter from the President on Emergency Determination Under the Stafford Act, available at
https://trumpwhitehouse.archives.gov/wp-content/uploads/2020/03/LetterFromThePresident.pdf.

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under §§ 139(c)(2) and 165(i)(5)(A). On February 24, 2021, the President continued the
national emergency concerning the COVID-19 pandemic beyond March 1, 2021.
8

On February 10, 2023, the President announced that he anticipated terminating the
national emergency concerning the COVID-19 pandemic on May 11, 2023.
9
On April
10, 2023, the President signed into law a Joint Resolution of Congress terminating the
national emergency concerning the COVID-19 pandemic.
10
Accordingly, the related
“Federally declared disaster,” as defined by §§ 139(c)(2) and 165(i)(5)(A), terminated on
May 11, 2023.
The remaining criteria for disaster relief payments under § 139(b)(4) are that the
payments be made “in connection with” a qualified disaster and that they are made in
order to “promote the general welfare.” In the context of a qualified disaster such as the
COVID-19 pandemic, payments made in connection with the disaster are presumed to
be made in order to promote the general welfare (that is, based on individual or family
need) for all individuals affected by the disaster. See Notice 2002-76, 2002-2 C.B. 917.
As in the case of the general welfare exclusion outside of § 139(b)(4), payments cannot
represent compensation for services.
.05 Information Reporting. Section 6041(a) generally requires that all persons
engaged in a trade or business and making payment in the course of such trade or
business to another person of rent; salaries; wages; premiums; annuities;

8
See Presidential Notice, 86 Fed. Reg. 11599 (February 24, 2021).
9
See Notice of February 10, 2023, Continuation of the National Emergency Concerning the Coronavirus
Disease 2019 (COVID-19) Pandemic, 88 Fed. Reg. 9385 (February 14, 2023), available at
https://www.federalregister.gov/documents/2023/02/14/2023-03218/continuation-of-the-national-
emergency-concerning-the-coronavirus-disease-2019-covid-19-pandemic.
10
See Joint Resolution relating to a national emergency declared by the President on March 13, 2020,
Public Law 118-3, 137 Stat. 6 (April 10, 2023), available at
https://www.congress.gov/118/plaws/publ3/PLAW-118publ3.pdf.

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compensations; remunerations; emoluments; or other fixed or determinable gains,
profits, and income, of $600 or more in any taxable year, must make a true and
accurate return to the Secretary of the Treasury or her delegate (Secretary).
Section 6041(d) provides that every person required to make a return under
§ 6041(a) must furnish to each person with respect to whom such return is required a
written statement showing the name, address, and phone number of the contact
information of the person required to make such return, and the aggregate amount of
payments to the person required to be shown on the return. Section 1.6041-1(b)(1)
provides that the term “all persons engaged in a trade or business,” as used in
§ 6041(a), includes organizations the activities of which are not for the purpose of gain
or profit. Thus, that term includes the organizations referred to in § 1.6041-1(i). Section
1.6041-1(i) provides that the United States or a State, or political subdivision thereof, or
the District of Columbia, or any agency or instrumentality of any one or more of the
foregoing must file Form 1099 Series information returns to report payments of $600 or
more and Form W-2, Wage and Tax Statement, to report wages paid to employees
under the provisions of § 1.6041-2. The information returns must be made by the officer
or employee having control of such payments or by the officer or employee
appropriately designated to make such returns. Form 1099-G, Certain Government
Payments, is used by States to report the amount of grants that are included in the
Federal gross income of the recipient.
Section 6050E(a) provides that every person who, with respect to any individual,
during any calendar year makes payments of refunds of State income taxes (or allows
credits or offsets with respect to such taxes) aggregating $10 or more must make a

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return according to forms or regulations prescribed by the Secretary setting forth the
aggregate amount of such payments, credits, or offsets, and the name and address of
the individual with respect to whom such payment, credit, or offset was made. Section
6050E and § 1.6050E-1(k)(1) provide that every person required to make a return under
§ 6050E(a) and § 1.6050E-1(c) must furnish to each individual whose name is required
to be set forth in such return a written statement showing the name of the State or
political subdivision thereof, and the information required to be shown on the return with
respect to refunds, credits, and offsets to the individual. Section 1.6050E-1(k)(2)
provides that a State refund officer need not furnish a statement to an individual under
§ 1.6050E-1(k)(1) if the refund officer verifies that the individual did not claim itemized
deductions for Federal income tax purposes for the taxable year giving rise to the State
tax refund. Form 1099-G is used by States to report State tax refunds.
SECTION 4. GUIDANCE FOR INDIVIDUALS RECEIVING AND STATES MAKING
CERTAIN STATE PAYMENTS
.01 State Income Tax Refunds. If an individual claimed the standard deduction on
the individual’s Federal income tax return for the taxable year in which the individual
paid State taxes, a State income tax refund (related to the prior payment of those State
taxes) in a subsequent taxable year is not includible in the individual’s gross income for
Federal income tax purposes. An individual who itemized deductions and deducted
amounts of State income taxes paid, however, is required to include the State tax
refund in gross income on the individual’s Federal income tax return to the extent that
the individual received a Federal income tax benefit from the prior Federal income tax
deduction.

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Example. In January 2023, State A enacted a statute providing that certain State A
funds be returned to certain individuals as a refund of State A income taxes paid in
2021. Pursuant to that statute, State A will pay up to $250 to individuals who filed
State A income tax returns for taxable year 2021 as single filers and up to $500 to
spouses who filed as married, filing jointly, but the payment cannot exceed an
individual’s State A income tax liability for taxable year 2021. B, a single individual, filed
a State A income tax return in 2022 for taxable year 2021 as a single filer. B reported
State A income tax liability of $2,500, all of which B paid through income tax withholding
in 2021. B filed B’s Federal income tax return in 2022 for taxable year 2021 and
claimed the standard deduction. In 2023, State A paid B $250 as a refund of B’s
State A income taxes paid for taxable year 2021.
State A’s payment of $250 to B is a State tax refund of B’s State A income taxes
paid f
or taxable year 2021. B claimed the standard deduction on B’s Federal income
tax return for taxable year 2021. Thus, B did not deduct State A income taxes paid on
B’s Federal income tax return for taxable year 2021. Accordingly, B is not required to
include the $250 State A income tax refund in B’s Federal gross income on B’s Federal
income tax return for taxable year 2023.
Section 6050E requires State A to file with the IRS and furnish to B a Form 1099-G
that includes the $250 payment in Box 2, State or local income tax refunds, credits, or
offsets, unless the State A refund officer (as defined in § 1.6050E-1(b)(1)) verifies that B
did not claim itemized deductions for Federal income tax purposes. Thus, B may
receive a Form 1099-G from State A that includes the $250 payment even though B is
not required to include the payment on B’s Federal income tax return for taxable year

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2023.
.02 State Property Tax Refunds. If an individual claimed the standard deduction on
the individual’s Federal income tax return for the taxable year in which the individual
paid State taxes, a State property tax refund (related to the prior payment of those State
taxes) in a subsequent taxable year is not includible in the individual’s gross income for
Federal income tax purposes. An Individual who itemized deductions and deducted
amounts of State property taxes paid, however, is required to include the State tax
refund in gross income on the individual’s Federal income tax returns to the extent that
the individual received a Federal income tax benefit from the prior Federal income tax
deduction.
E
xample. In March 2023, State C enacted a statute providing that certain State C
funds be returned to certain individuals who paid State C property taxes in 2021.
Pursuant to that statute, State C will pay individuals a refund equal to the lesser of 10%
of State C property taxes paid or $300. D, an individual, was liable for State C property
taxes of $2,800 for taxable year 2021, which D paid in 2021. D filed D’s Federal income
tax return in 2022 for taxable year 2021 and claimed itemized deductions totaling
$9,000, which included the $2,800 property tax payment and which reduced D’s Federal
income tax liability for the year. In 2023, State C paid D $280 as a refund of D’s State C
property taxes paid for taxable year 2021 and made no other payments to D.
State C’s payment of $280 to D is a State tax refund of D’s State C property taxes
pai
d for taxable year 2021. D claimed the $2,800 property tax payment as a deduction
on D’s Federal income tax return for taxable year 2021, with a corresponding reduction
in D’s Federal income tax liability for the year. Accordingly, D is required to include the

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$280 State C property tax refund in D’s Federal gross income on D’s Federal income
tax return for taxable year 2023.
State C is not required to file or furnish an information return with respect to the $280
payment to D. Section 6050E does not apply because the payment is a refund of State
property taxes paid, not a refund of State income taxes. Section 6041 does not apply
because the
total payments from State C to D in 2023 were less than $600. The fact
that no information return is required does not relieve D of the obligation to include the
$280 in D’s Federal gross income.
.03 Spillover Payments under 2022 Programs Covered by IRS News Release IR-
2023-23. Some of the 2022 programs covered by the guidance in IRS News Release
IR-2023-23 provided for certain State payments under the program to be made in early
2023. To the extent that the News Release provided that an individual taxpayer could
exclude such a State payment received in 2022, individual taxpayers who did not
receive a payment under the program during 2022 may exclude a State payment
received in 2023 under the 2022 program from Federal gross income.
Example. In 2022, State E enacted a program to make State payments to its
residents who met certain requirements (2022 program). Under the 2022 program,
each State E resident who filed a 2021 State E income tax return was entitled to receive
$750. State E made most of the State payments under the 2022 program on or before
December 31, 2022. Under the 2022 program, State E may make remaining 2022
program State payments in early 2023. State E made a 2022 program State payment
of $750 to F on January 15, 2023. State E’s 2022 program was listed in IRS News
Release IR-2023-23 as one of the programs that would be treated as qualifying for an

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exclusion from Federal gross income for 2022 payments.
Because State E’s January 15, 2023, State payment to F resulted from the 2022
program, which was listed in IRS News Release IR-2023-23 as qualifying for an
exclusion from Federal gross income, F may exclude this State payment from Federal
gross income on F’s Federal income tax return for taxable year 2023. Because the
State payment from the 2022 program is not Federal gross income to F, § 6041 and
§ 1.6041-1 do not require State E to file with the IRS or furnish to F a Form 1099-MISC,
Miscellaneous Information.
.04 State Payments Excluded Under the General Welfare Exclusion. State
payments made under a State program for the promotion of the general welfare are not
includible in an individual’s Federal gross income. To qualify under the general welfare
exclusion, State payments must be made from a governmental fund; be for the
promotion of the general welfare (that is, based on individual or family need); and not
represent compensation for services.
E
xample. In 2023, State G makes State payments to eligible residents under an
“Energy Relief Payment Program” to help those low-income residents who may not
otherwise be able to afford to pay their heating bills. Eligible residents were limited to
those who lived in State G full time in 2021 and filed a State G income tax return for
taxable year 2021 no later than October 31, 2022. State G pays $650 to low-income
taxpayers who filed as single or married, filing separately, for taxable year 2021.
Individual H filed a State G income tax return for taxable year 2021 as a single filer.
State G paid a $650 State payment to H in 2023.
State payments that State G makes under its Energy Relief Payment Program are

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made for the promotion of general welfare and are excluded from Federal gross income
under the general welfare exclusion. Thus, H may exclude the $650 State payment
from Federal gross income for taxable year 2023 under the general welfare exclusion.
Section 6041 and § 1.6041-1 do not require State G to furnish to H an information return
that includes the $650 State payment.
SECTION 5. REQUEST FOR COMMENTS
.01 In General. Comments are requested on the application of the rules described
in this notice. Comments are also requested on specific aspects of State payment
programs or additional situations with respect to which the issuance of Federal
income tax guidance would be helpful. Comments are specifically requested on the
Federal income tax treatment of payments that are characterized under State law as
State sales tax refunds in light of the fact that it may not be practicable to determine
the amount of State sales tax an individual paid during a particular taxable year.
After considering the comments, the Department of the Treasury (Treasury
Department) and the IRS intend to issue further guidance on the Federal income tax
consequences of State payments.
.
02 Procedures for Submitting Comments.
(1) Timing. Comments should be submitted in writing on or before October 16,
2023. Consideration will be given, however, to any written comments submitted after
October 16, 2023, if such consideration will not delay the issuance of further
guidance.
(2) Form and manner. The subject line for the comments should include a
reference to Notice 2023-56. All commenters are strongly encouraged to submit

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comments electronically. However, comments may be submitted in one of two ways:
(a) Electronically via the Federal eRulemaking Portal at
https://www.regulations.gov (type IRS-2023-0033 in the search field on the
https://www.regulations.gov homepage to find this notice and submit comments); or
(b) By mail to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2023-56),
Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.
(3) Publication of comments. The Treasury Department and the IRS will publish
for public availability any comment submitted electronically or on paper to its public
docket on https://www.regulations.gov.

SECTION 6. DRAFTING AND CONTACT INFORMATION
The principal author of this notice is Jonathan Hauck of the Office of the Associate
Chief Counsel (Income Tax and Accounting). Other personnel from the Treasury
Department and the IRS participated in its development. For further information
regarding this notice contact Jonathan Hauck at (202) 317-7009 (not a toll-free number).