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When your state government sends you money, it might feel like free income. But the IRS may see it differently. Whether state payments are taxable depends on the reason for the payment.
You’ll usually receive Form 1099-G when the state issues certain types of payments. Here’s what those could include:
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Unemployment compensation
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State tax refunds
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RTAA (Reemployment Trade Adjustment Assistance) payments
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Taxable grants
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Agricultural payments
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Market gains on repayment of CCC loans
Let’s break it down.
1. Unemployment Benefits
If you received unemployment compensation, you must report it as income on your federal tax return. Federal and state taxes can be withheld from unemployment, but if not, you’ll owe taxes when filing.
👉 Related: Understanding Form 1099-G
2. State Tax Refunds
If you itemized deductions last year using Schedule A, your state tax refund may be considered taxable income. This prevents what the IRS calls “double-dipping”—claiming a deduction and also getting a refund for the same amount.
👉 Related: Filing Deadlines for Information Returns
3. RTAA Payments
Reemployment Trade Adjustment Assistance (RTAA) provides wage subsidies to eligible workers over 50 who lost their jobs due to trade-related issues. These payments are taxable because they serve as wage replacement.
4. Energy Subsidies
If you received energy cost subsidies or government incentives for conservation projects, amounts over $600 are generally taxable and must be reported.
5. Agricultural Program Payments
Most agricultural subsidies must be reported on Schedule F. Some cost-sharing conservation payments may be excluded, but others must be reported in full—even if refunded or reduced later.
👉 Related: Form 1099-MISC Reporting Guide
6. CCC Loan Market Gains
If you repaid a Commodity Credit Corporation (CCC) loan and reported a market gain, that amount is taxable income. This applies whether repayment was made in cash or with CCC certificates.
📌 Final Note
The taxability of state payments depends on the type of income. If you’re unsure, it’s always best to consult with a tax professional.
Using professional IRS e-file software can also help ensure accuracy and compliance when reporting these payments.