So much for filing your taxes early this year. The IRS is scrambling to figure out if state-issued stimulus checks and rebates sent out in 2022 are taxable at the federal level. In the meantime, the IRS told those who received such payments to hold off on filling their tax returns until the agency releases clarification.
Why it matters
Last year millions of taxpayers across the country received relief payments from their state, which are similar to the federal stimulus checks that went out earlier in the pandemic. Those payments could end up being taxed at the federal level.
- Many states framed the payments as aid from rapidly rising prices due to inflation, while others considered the payments pandemic relief. The IRS may consider the purpose of the payments to determine whether to tax them federally.
- California is one notable example. The state issued $9 billion worth of relief payments through its Middle Class Tax Refund program to more than 16 million residents. California officials said the payments are not taxable at the state level, but it’s unclear yet whether the IRS will consider the payments federally taxable.
- “There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex,” the IRS said in a recent statement.
Money identified at least 19 states that issued refunds or rebates last year. Taxpayers in the following states may want to wait for an update from the IRS before filing:
- New Jersey
- New Mexico
- Rhode Island
- South Carolina
What the experts say
For those who want their tax refund as early as possible, experts generally recommend that they file their taxes early. However, this wrinkle with state-level relief payments temporarily upends that common piece of advice.
The IRS says it will have an update for taxpayers who received state-level relief payments as early as this week. Until then, sit tight.
“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,” the agency said. “We also do not recommend amending a previously filed 2022 return.”