If you’re one of the millions of taxpayers who received a one-time tax payment from your state last year, the Internal Revenue Service has some advice: Hold off on filing your federal income tax return.
Even though tax season started on Jan. 23, the I.R.S. is still determining whether the payments — sent last year to taxpayers in nearly two dozen states as a way to provide relief from spiraling inflation — should be treated as taxable income on their federal returns.
Late last week, the I.R.S. said that it was working with state tax officials, and it expected to provide more guidance “for as many states and taxpayers as possible” this week.
“There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex,” the I.R.S. said in a statement. “For taxpayers uncertain about the taxability of their state payments, the I.R.S. recommends they wait until additional guidance is available or consult with a reputable tax professional.”
It is an arduous task for the I.R.S. to untangle what is federally taxable because each state that sent checks to residents in 2022 classified those payments in their own way, and had different eligibility requirements and varying reasons for doing so.
In California alone, nearly 17 million taxpayers received a one-time “middle class tax refund” of up to $1,050 for relief against rising prices. The payments do not need to be claimed as income on California state income tax returns, according to a spokesman for California’s Franchise Tax Board. In South Carolina, the payments, also called “rebates,” were based on taxpayers’ 2021 tax liability.
Various tax policy groups are also doing their own calculations of how many states could be affected, based on their readings of the payments and how they define the term “rebate.”
The Tax Policy Center, a nonprofit research group, counts 18 states that sent one-time income tax rebates in 2022 — Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Mexico, New York, Oregon, Rhode Island, South Carolina, and Virginia.
But according to a list compiled by the Tax Foundation, a nonprofit tax policy group, 22 states may be affected. It also included Minnesota’s rebate, which only went to its frontline workers — a small portion of the population.
These special payments have caused confusion because the I.R.S. must sort through each state’s program to determine their taxability. For example, disaster relief payments are not taxable, which is why stimulus payments sent out during the coronavirus pandemic were not treated as income, said Jared Walczak, vice president of state projects at the Tax Foundation.
Social benefit programs that help low-income households are also generally not considered taxable income. But the states generally characterized last year’s payments to taxpayers as inflation relief, and in other cases they sent the money because they had state surpluses, tax experts said.
“Ultimately, it is the I.R.S.’s job to determine what the true function is,” said Mr. Walczak. “It may be all taxable or not taxable in some states, while in other states taxability may differ based on whether a taxpayer itemized or took the standard deduction.”
TurboTax, the giant online tax preparation service, has made a determination of its own. Based on “currently available information” and its “own expertise,” it said it believes the payments are not taxable at the federal or state level — and it has not dissuaded its customers from filing.
“We are providing guidance to our customers and are hopeful for additional clarification in the near future,” said Lisa Greene-Lewis, an accountant and tax expert with TurboTax.
But many other tax preparers across the country are frustrated that the guidance had not been sorted out before tax season opened.
Dan Herron, an accountant and financial planner in San Luis Obispo, Calif., said he had held back on filing for taxpayers who received the middle-class tax credit in their state given all of the confusion.
“It is so frustrating considering these kinds of payments have been sent out during 2022, yet the I.R.S. didn’t worry about it until … NOW,” he said in an email. “Clients express their frustration to us, which makes us frustrated with the I.R.S. It’s not a fun situation to be in.”
