House passes bill aimed at exempting state’s $300 per adult payment from federal income tax

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The Delaware House unanimously passed legislation Thursday that would essentially absolve residents from paying federal taxes on Delaware relief rebate checks they received last year.

The General Assembly overwhelmingly approved the 2022 Delaware Relief Rebate Program, which established a relief rebate – a one-time direct payment per Delaware resident taxpayer who filed personal income tax returns for tax year 2020 and adult residents who did not file a 2020 tax return. The rebate is not subject to Delaware income taxes. However, the payment still could be federally taxed under the original version of the law.

Legislative leaders pushed the measure through as Maryland temporarily suspended the state’s gasoline tax. It turned out that bond restrictions for transportation projects in Delaware barred the use of a gas gax holiday. Republican legislators would have preferred, a permanent tax cut, but supported the one-time $300 payment for Delaware adult residents.

Democrats still see recent budget surpluses as temporary, with the possibility that a recession could lead to a state budget shortfall like the one seen in 2018, a relatively good year for the U.S. economy.

House Bill 25, sponsored by House Majority Leader Rep. Valerie Longhurst, would declare that the relief rebate payments be treated as a tax-exempt qualified relief payment under Section 139 of the Internal Revenue Code.

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“We did right by our residents last year in providing them with some economic relief through direct payments. Now, we are going a step further to protect them from having to pay federal taxes on those payments. It’s another move we can make to help Delawareans, and it’s the first action of what I hope are many to provide a hand up to residents in need. I’m grateful for such broad support for this measure,” stated Longhurst, D-Bear.

Since the General Assembly passed and Governor John Carney signed HB 360 into law last spring, the state has sent 782,000 checks to Delawareans, with more payments made this month.

“The rebates were already excluded from state income tax and this bill, once enacted, will ensure that Delawareans will not owe any federal tax on the payments either,” said House Minority Leader Rep. Lyndon Yearick, R-Camden, Wyoming. “I hope we can retain the bipartisan cooperation demonstrated on this measure as we look to further help working Delawareans struggling with higher inflationary costs.”

Under HB 25, as a federally declared disaster, the Covid-19 pandemic is considered a qualified disaster under the IRS Code. Funds received in connection with the pandemic could then qualify as a disaster relief payment and be excluded from a person’s gross income, saving residents from paying taxes on the $300 payment.

The program was estimated to cost more than $180 million and was funded through a budget surplus.

HB 25 now heads to the Senate.

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