Don’t file your taxes just yet, says IRS amid confusion over state benefits
“Payers who are uncertain about the taxability of their state payments, the IRS recommends waiting until additional guidance is available or consulting a reputable tax professional,” the agency said. waiting for additional clarification on state payments rather than calling the IRS.
Faced with a plethora of additional revenue from wage increases in 2021 and 2022, nearly two dozen states made payments over the summer to fight inflation. California tax refund for the middle class distributed payments worth between $200 and $1,050; nearly 16 million taxpayers have already received the payouts and 23 million are eligible.
New York awarded inflation support payments worth $270 to middle-to-low-income residents and introduced rent and property tax relief. Oregon sent one-time $600 checks to low-income households, and Georgia gave taxpayers a $500 credit after they filed their 2021 returns.
The tax status of those payments varies by state and depends on the declared purpose of the program, tax professionals say.
For example, if the payments were for pandemic relief, they should be exempt from federal tax because they fall under disaster relief. If they were intended for inflation or other economic benefits, they are likely taxable.
“It all depends on what the [state] the legislature has decided,” said Jared Ballew, director of government relations at Drake Software. “Was it for the benefit of that money, or is it like a tax refund, which would be taxable at the federal level?”
The robbery threatens to complicate a tax season that has so far been relatively smooth according to IRS officials and tax policy experts. But the agency has struggled to pass some tax code changes backed by President Biden and other prominent Democrats, even though they were signed into law several months ago or even earlier.
“They had a chance to see this coming,” Ballew said.
The groundbreaking Inflation Reduction Act that went into effect last year included tax credits for consumers who buy American-made electric vehicles.
But the IRS has enforced broad guidelines that include vehicles without the required amount of U.S.-made parts, which could make them eligible for the tax break longer than expected.
Another major legislative win from Biden, the American Rescue Plan Act of 2021, taxes transactions worth $600 or more made through third-party payment apps like Venmo and PayPal.
The IRS also delayed guidance on that question, saying it won’t apply until the 2023 tax year.