The U.S. social welfare system is of enormous size and complexity. Millions of Americans receive benefits under Social Security, Aid to Families with Dependent Children (AFDC), food stamps and other social welfare programs. The federal government alone spent about $744 billion on social welfare programs in fiscal year 2019.
While Congress subjects unemployment compensation and some portion of Social Security benefits to income taxation, the IRS excludes from taxable income those welfare benefits that the U.S. government and states distribute to individuals based on need.
Means-Tested Social Welfare Programs
Social welfare policy analysts differentiate between means tested transfer programs and those programs that are not. The eligibility for, and benefits of, means-tested programs, such as Supplemental Security Income, Medicaid, energy assistance, food stamps and housing assistance, depend upon need as measured by income and assets. Eligibility for a non-means-tested program, such as Social Security and Medicare, is determine by other criteria, including age and work history.
The rule for whether need-based benefits are taxable is: If compensation is paid in exchange for benefits, or if benefits are paid for a reason other than need, the benefits can be included in a taxpayer's taxable income.
Aid to Families with Dependent Children
One example of a means-tested program is the Aid to Families with Dependent Children program (AFDC.) The AFDC program provides cash assistance and other services to needy families with dependent children so those families can be self-sufficient. Through individual states, the AFDC provides cash welfare payments for needy children who have been deprived of parental support or care due to a parent's incapacitation, death, unemployment or continuous absence from the home. The program also covers welfare payments to certain others in the child's household.
In the year 2021, the AFDC program, under the auspices of the American Rescue Plan Act of 2021 included $1 billion in Pandemic Emergency Assistance funds. The ARPA was the first new federal TANF funding in more a decade.
Read more: Does Welfare Affect Income Taxes?
Federal Tax and Social Welfare Benefits
The IRS imposes tax on a taxpayer's taxable income. To calculate the tax you owe, begin by determining gross income. Gross income is the sum of any and all income you receive, regardless of the source. For instance, wages, salary, tips, interest, dividends, rents and royalties that you receive are taxable in the year you receive them.
There are, however, statutory exclusions from your gross income. For instance, neither your inheritance nor the gifts you receive are included in gross income. Likewise, welfare payments are excluded from taxable income.
Read more: Facts and Myths About Welfare
What Is Taxable Income?
To calculate your taxable income, subtract IRS-allowed deductions from your gross income. For instance, gross income includes the compensation you receive from your employer before taxes and deductions. It also includes income you receive from other sources, such as rental income, interest income and dividends. As state above, your welfare check is excluded from your gross income.
Are Welfare Benefits Taxable?
Assume that you live in Texas and earn $78 a month, which is equal to the maximum monthly income allowed by the Texas Temporary Assistance for Needy Families (TANF) program. For purposes of federal income taxes, the total amount subject to federal income taxes equals $78 multiplied by 12, or $936 per tax year. The cash you receive from the state of Texas in the form of public assistance payments is excluded from the calculation of your taxable gross income as per IRS policy.
This calculation is in compliance with IRS publication 525, which states that when calculating taxable gross income, a taxpayer should exclude payments received from a public welfare fund, including AFDC, SSI, food stamps, Medicaid and housing assistance benefits.
Expenses Related to Welfare Benefits
Since welfare benefits aren't taxable, you can't deduct medical expenses or other expenses that would otherwise be deductible when paid with earned income. In other words, medical expenses for which you are reimbursed as a welfare benefit are not tax deductible.