IRS Recommends Taxpayers Wait for ‘Additional Clarification’ Before Filing Returns Due to Refund Confusion

A W-4 tax form in New York, on Feb. 5, 2020. Patrick Sison/AP Photo

The Internal Revenue Service has advised millions of taxpayers who have benefited from state rebate and refund payment programs to currently hold off from filing their income tax return while the agency decides on how to treat such receipts.

“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. For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional,” the agency said in a statement on Feb. 3.

“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.”

Over a dozen states had issued rebates and refunds to citizens last year similar to federal pandemic stimulus payments. For instance, California alone made over 16 million special Middle-Class Tax Refund payments in 2022, which were aimed at helping people offset high gas prices and inflation.

Taxing State Payments

Whether the rebates and refunds issued by states to its citizens are taxable federally will depend on the purpose it aimed to fulfill as well as federal laws on taxes. State payments for COVID-19 relief are believed to be exempt from federal taxation as they can be cited as disaster relief payments.

In California, tax authorities have said that though payments made by the state won’t be subject to state taxes, the federal administration might tax them.

According to California’s Franchise Tax Board, the state tax authority, more than 6.4 million 1099-MISC reporting forms have been issued to citizens who have received $600 or more in such payments.

“Based on currently available information, and our own expertise, our understanding is that these payments are not taxable at the federal or California state level,” Lisa Greene-Lewis, a spokesperson for TurboTax, said to the San Francisco Chronicle. “We are providing guidance to our customers and are hopeful for additional clarification in the near future.”

H&R Block Inc, a tax-preparation company, has also concluded that payments made by the state of California wouldn’t be taxable even at the federal level since payments that promote general welfare are usually not included when considering federal income.

Both TurboTax and H&R Block are filing returns for their clients with the assumption that California’s payments are not taxable.

“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,” said Kathy Pickering, chief tax officer at H&R Block, according to The Wall Street Journal.

Continuing Payment Programs

Several state payment programs are still ongoing. In Idaho, a $500 million measure signed last year enables citizens who filed taxes in 2020 and 2021 to get 10 percent of their tax returns or $300 from the state, whichever is higher. The program will end in March.

In New Jersey, the state is granting a $1,500 tax rebate for homeowners making incomes of up to $150,000 a year. People who make between $150,000 and $250,000 will get $1,000 in rebate.

In addition, renters can get a rebate of $450 provided they do not make in excess of $150,000 per year. Rebate payments are scheduled to be disbursed in the first several months of this year.

South Carolina is offering rebate checks of up to $800. Those who file their taxes by Feb. 15 are scheduled to get their rebates in March.