The IRS is telling millions of taxpayers to wait to file their returns until it determines if state refund and rebate payments sent in 2022 will count as taxable income.
More than 16 million special Middle-Class Tax Refund payments were issued to California residents last year, totaling $9 billion, according to Fox Business. The payments were to help with inflation and high gas prices. The IRS still needs to clarify if these payments will be counted as federal taxable income.
More than 12 states issued these payments last year. The taxable nature of these payments depends on their purpose, according to The Wall Street Journal.
The IRS is expected to issue guidance on these payments this week after releasing a statement on Friday.
“We are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers. There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week,” the IRS said in the statement.
“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. We also do not recommend amending a previously filed 2022 return.”
One tax professional said that the IRS should have made the decision earlier.
“The IRS should have been proactive prior to the start of filing season to determine if state rebates and refunds are taxable for federal tax purposes. Waiting until mid-February to decide if state rebates are taxable creates confusion and delays refunds for low- and middle-income taxpayers who rely on receiving their tax refund early in the year,” Andrew Poulos, EA at Poulos Accounting, told The Dallas Express.
“Most states won’t consider tax refunds and rebates taxable income for state tax purposes, and the IRS will most likely not count them as income for federal tax purposes since it appears these payments were issued as a form of Covid relief. It’s best for taxpayers to wait until the IRS announces their determination, but not everyone can wait a few days or a week. Many people need their refund sooner than later with the current economic environment,” Poulos said.
Tax preparation giants H&R Block and Intuit have taken the position that the California payments are not taxable, and both firms continue to file returns for their clients, according to The Wall Street Journal (WSJ).
“Many taxpayers who file early in the season are very anxious for their refunds. Waiting another week to file would mean waiting another week for their refund,” Kathy Pickering, chief tax officer at H&R Block, told The Wall Street Journal.
The taxable nature of the payments may depend on whether a taxpayer itemizes deductions. Virginia’s “up-to-$500 payment” in 2022 is treated like a state tax refund, meaning it will be taxable for individuals who itemize but not for those who take the standard deduction, which according to Forbes, 90% of taxpayers do.
State tax authorities in California say the payments are not taxable for state income tax purposes but might be taxable for federal purposes. The Golden State issued over 6.4 million 1099-misc forms to those who received payments of over $600, according to the Franchise Tax Board, California’s tax authority.
“That’s left everybody in a state of confusion,” Pickering said, as reported by the WSJ.
H&R Block said the California payments are not taxable for federal purposes since certain payments promoting general welfare are excluded from federal income. As such, they are filing for customers who received the payments but are not including them as taxable income.
Intuit is taking a similar position, saying the payments are not taxable for federal purposes, according to Lisa Greene-Lewis, a CPA and editor at Intuit’s TurboTax, said the WSJ.
