To file or not to file? Millions of Americans are in tax season limbo due to an eleventh hour IRS probe into inflation relief checks.
Taxpayers in 22 states were told to delay filing their taxes until the tax agency can clear confusion around the federal taxability of state tax rebates and payments handed out in 2022.
For some, the warning came too late. The IRS had received nearly 17 million tax returns before asking taxpayers to hit the pause button.
“This uncertainty is unfair to taxpayers,” wrote Jared Walczak, vice president of state projects at the Tax Foundation, an independent tax policy nonprofit, in a blog post.
“Tax experts have long known that the taxability of state rebate payments would be an issue, but the IRS remained silent until February 3rd, at which point it basically said we’ll get back to you soon.”
Will the Fed tax your inflation relief?
Inflation was the word of the year in 2022. The U.S. closed out the year with the consumer price index up 6.5% from 2021.
To help residents weather the economic storm, many states launched special one-off rebate programs.
For example, California returned over $9 billion to more than 31.6 million taxpayers through its Middle Class Tax Refund — a one-time relief payment of up to $1,050 for eligible claimants.
On the opposite coast, Maine handed out $850 relief checks to around 858,000 people, returning $729.3 million — more than half of its budget surplus — to eligible taxpayers.
Another 20 states handed out various stimulus support packages as well.
But on Feb. 3, the IRS called into question the taxability of that relief — much to the annoyance of taxpayers and tax preparers across the country.
One Reddit user said the IRS has “thrown a wrench in the works” with its last-minute investigation, while another described this tax season as a “mess.”
There are several instances laid out in the Internal Revenue Code where the IRS will not tax income. For example, state tax rebates in response to qualified disasters, like the COVID-19 pandemic, are not subject to federal income tax.
Rebates classified as social benefit programs for specific populations — like those in Florida and Rhode Island for families with children — could also be exempt from federal taxation.
The rules surrounding the different state programs “are complex,” according to the IRS, which is now “working with state tax officials as quickly as possible to provide additional information and clarity” around if and how rebates or special payments will be taxed.
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What can you do if you got a check from your state?
So what can you do if you got a check from your state? According to the IRS, you should sit tight and hold off on picking up the phone.
The tax agency has urged taxpayers to wait for more information rather than clogging up the agency’s phone lines.
If you’re uncertain about the taxability of your state payment, the IRS recommends waiting to file your return “until additional guidance is available or consult with a reputable tax professional.”
If you’ve already filed your tax return, the IRS doesn’t recommend filing an amendment until they’ve released further guidance.
“It’s not every day that you get the chance to play the tax season lottery, right?” one Reddit user joked. “Just kidding, of course. But seriously, it’s always better to play it safe and wait for the IRS to provide their guidance.”
You don’t want to be left filing multiple amendments because you misunderstood the government’s guidance around state rebates and special payments.
If you need help, go to a professional — the fee is often worth it to file your taxes correctly.
Online tax software can also help to ease the burden of tax season and will typically connect you to an expert if you have questions or need more help as you go.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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