The IRS is asking millions of taxpayers in 22 states including California and Colorado who received tax rebates last year to hold off on filing their taxes.
The reason: The agency said it is seeking to clarify whether those tax rebates and special refunds are considered taxable income. “We expect to provide additional clarity for as many states and taxpayers as possible next week,” the IRS said on February 3.
About 16 million California residents received “middle-class tax refund” checks of $350 per eligible taxpayer last year, part of a relief package designed by the state to help residents cope with soaring inflation at a time when the state had a budget surplus.
At least 22 states authorized tax rebates last year as their coffers were buoyed by strong economic growth and federal pandemic aid, according to the Tax Foundation. The following states sent rebate checks to at least some of their taxpayers last year, the Tax Foundation said:
AlaskaArkansasCaliforniaColoradoConnecticutDelawareFloridaGeorgiaHawaiiIdahoIllinoisIndianaMaineMassachusettsMinnesotaNew JerseyNew MexicoNew YorkOregonRhode IslandSouth CarolinaVirginia
But those one-time windfalls are now throwing a wrench into tax season for millions of Americans, many of whom count on getting timely tax refunds to pay down debt, make a purchase or get on top of bills. Last year, the average tax refund (for the 2021 tax year) was almost $3,200, a 14% jump from the prior year, according to IRS data — an amount that’s bigger than the typical worker’s paycheck.
“This uncertainty is unfair to taxpayers,” wrote Jared Walczak, vice president of state projects at the Tax Foundation, a tax-focused think tank, 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.”
Adding to the confusion for taxpayers is that the federal government’s tax rebates — sent in the form of three stimulus checks during the pandemic — were not considered taxable income by the IRS.
Some taxpayers took to social media to express their frustration at the IRS guidance that they should delay filing their tax returns. The agency started accepting returns for this year’s tax season on Jan. 23.
“So I tried to sit down this morning for a fun game of Do Your Taxes, but turns out the IRS hasn’t decided if California’s Middle Class Tax Relief payments are taxable or not…,” one taxpayer wrote on Twitter.
The IRS issued the guidance after Rep. Kevin Kiley, a Republican from California, wrote to the tax agency to say that his office had been contacted by “numerous” constituents asking for help on the issue.
“Many of the 16 million residents of California who received the refund are unable to file a 2022 tax return because they do not have clear guidance as to whether to include this payment” as taxable income, he wrote in the February 2 letter.
On Friday, the IRS advised, “[T]he best course of action is to wait for additional clarification on state payments rather than calling the IRS.”It added, “We also do not recommend amending a previously filed 2022 return.” Amended returns have been caught up in the IRS’ backlog, leading to processing delays.