UPDATE, February 10, 2023: There's good federal tax news for residents in 21 states who last year got some financial relief from their states. The Internal Revenue Service has determined that the stimulus/tax refund payment amounts are not subject to federal tax.
Remember back in January when I listed 6 reasons why you should wait to file your federal tax return? The Internal Revenue Service has come up with a new one for taxpayers in several states.
Specifically, the IRS is telling individuals who last year received special state-issued payments to help offset higher inflation costs to wait before submitting their 2022 federal 1040s.
The reason for the delay? The IRS must decide how much, if any, tax it's going to collect on the state relief amounts.
Residents in 17 states awaiting IRS word: Officials in 21* states last year issued inflation-prompted relief checks to at least some of their residents.
The payments were distributed in Alaska, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, and Virginia.
Californians are one of the largest groups with potential federal tax liability. The California Franchise Tax Board issued more than $9 billion in MCTR relief. Most of this one-time payment amount went out last year to 16.6 million Golden State residents as either direct deposits to financial accounts or as debit cards.
Across the country, the New York Tax Department issued $475 million in additional New York State child and earned income tax payments to about 1.8 million people. Most of that money was distributed last fall.
Working on it: In most cases, the recipients were told by their state officials that the relief funds were tax-free at the state level.
Now, taxpayers filing their federal returns are learning that they might owe federal tax on the state relief payments.
We don't know yet what, if any, Uncle Sam's possible cut of the payments will be.
The IRS says it is "working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers," but the number of states and payments and "the rules surrounding them are complex."
The IRS' goal is to come to a decision soon, possibly this week for most, if not all, the affected states.
So, if you got a special state relief payment and haven't filed your federal tax return yet, wait a bit longer.
*Updated Friday, Feb. 10, 2023, to include four states
(Alaska, Connecticut, Oregon, and Rhode Island) that were left out of the original post's list.
You also might find these items of interest:
- State tax department online links
- 7 reasons to file your tax return early
- Answers to these filing checklist questions could make a big tax difference