Of course we all know that the stimulus payments are not subject to Federal income tax because they are tax credits.
But are any _states_ considering this $1200 as taxable income? (I'm personally concerned with New York and California.)
Each state is free to set it's income tax almost anyway they want within certain limits. E.g., they are precluded from taxing income that is sourced from federal debt obligations; they are precluded from taxing railroad retirement benefits; and they are precluded from taxing tribal members of recognized native american tribes who live on tribal land and earn the money on tribal land. As such, they can define income to include or exclude whatever they want within the constraints of the US and State Constitutions.
I am not aware of any of the 43 states that have some form of a personal income tax that include as income a refundable federal tax credit. The stimulus payment is an advance of a refundable tax credit (Recovery Rebate Credit). But.... a BIG BUT....
There is an issue with 6 states (AL, IA, LA, MO, MT & OR). These states provide some form of deduction for federal income taxes paid. So.... if someone did not receive a stimulus payment but is entitled to one or if someone received less than the maximum amount and file a 2020 federal return that includes the Recovery Rebate Credit, that will lower their federal taxes, reduce the state credit and thereby increase the state tax. E.g., based on 2019 income someone got $900. Based on lower 2020 income they are entitled to a $1200 credit. Their tax return will reflect a $300 tax credit that will increase state taxable income by $300. I do not know whether any of these 6 states have made changes to their law.
No to NY & CA and No to the other 41 states that have some form of a state income tax. None of them base their income tax on your federal income tax. They base their income tax on income. As such, as the payment is not income, no state tax.
That said, that does not mean that the payment is completely free from attachment, levy, or garnishment. It can be seized if you owe back child support. As to other reasons such as owing spousal support or bank debt offset, you would need to look at state law or recent announcements from a state on this subject.
Thanks, Alan. It's not always obvious when money received is and is not income, and I didn't want a nasty surprise.
If I had owed California state tax on the stimulus payment, and underpaid my estimated California tax, I could owe a penalty.
It does bring up the question of what does and does not constitute income. In the case of federal taxes, the stimulus payment is not considered income because the IRS, which issues the payments, specifically says it is not income.
But what is the reason that the payments aren?t considered income under the various state tax requirements? Is it that the states have also said the payments aren't considered income, or is because the states base their income definition on whatever the IRS says for federal returns? I ask this because I live in a state that does not have a state tax.
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