IRS Tells Millions Of Taxpayers In 22 States To Delay Filing Returns

Update (11:25am ET): On Friday, the IRS said filers in 17 states needn’t report special payments from those states on 2022 tax returns: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.

The IRS said special payments received by Alaskans aren’t federally taxable either, clarifying that this is the case “only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.”

In Georgia, Massachusetts, South Carolina and Virginia, things are more complicated: “State payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.”     You really have to hate that 16th Amendment.  

* * *

The IRS has advised millions of Americans in 22 states to delay filing their tax returns, while the agency tries to figure out if certain 2022 payments from those state governments are federally taxable or not.

At issue: state rebate checks that some people received from Alaska, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, South Carolina, and Virginia.

The Tax Foundation‘s Jared Walczak says the IRS should have sorted this out long ago:

“It’s unfair to taxpayers that we’re more than a week into February and still don’t know what millions of them are supposed to put on their federal tax returns. This could have—and should have—been avoided.”

The IRS’s overdue homework assignment is complicated by the lack of uniformity in the nature of these one-time payments from nearly two dozen states. Qualifications for the payments varied. For example, Florida’s and Rhode Island’s focused on families with kids, and only front-line workers qualified for Minnesota’s.

Many, like California’s, were characterized as a “middle-class tax refund” to counter inflation. That could put them in a different — and thus taxable — category, as compared to pandemic relief or welfare payments. Alaska’s was cast as additional proceeds from the state’s Permanent Fund Dividend that residents receive annually.

“There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex,” said the IRS in a statement posted last Friday, Feb. 3. “We expect to provide additional clarity for as many states and taxpayers as possible next week.” However, “next week” is almost over, and the IRS still hadn’t provided any new guidance as of Thursday evening.

“For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS,” the agency added. The IRS says that if you’ve already filed, you shouldn’t amend your return. 

TurboTax apparently thinks it knows the answers ahead of the IRS, with a spokesperson telling The New York Times that based on “currently available information” and the firm’s “expertise,” it’s concluded the rebates aren’t taxable at either the state of federal level, and isn’t telling users to pump the brakes.

By urging delayed filing, the IRS is imposing costs on many people, starting with foregone interest and use of money while Uncle Sam continues holding funds that will eventually be refunded when returns are filed.

Advisors recommend filing earlier in the cycle, to help thwart criminals who may claim a refund using your identity.

Alas, rebate recipients in 22 states have to wait for the criminals in Washington to sort out the particulars of their own extortion racket first.