As the U.S. heads into the thick of tax-filing season, the IRS is telling millions of taxpayers who live in states that issued state refund and rebate payments to hold off on filing their returns.
Taxpayers should wait to file until the IRS issues guidance on whether those state-issued payments should be classified as taxable income, the agency says. The IRS told taxpayers to expect more guidance on how to properly file their returns within the "next week," according to a notice dated Feb. 3.
More than a dozen states doled out rebates and refunds to residents in 2022, similar to the federal stimulus payments that were sent out during the height of the pandemic. But whether those payments are taxable in the eyes of the federal government remains to be seen — and it depends on what the intention for the payments was. If states sent out rebates to residents for COVID-19 relief, those funds are considered disaster relief and classified as tax-exempt.
In Virginia, taxpayers received a rebate of up to $500 that will be treated as a state refund, making it taxable for individuals who itemize deductions, but not for those who take the federal standard deduction. California issued more than 16 million special Middle Class Tax Refund payments to help residents cope with inflation. Whether the rebates, which amounted to some $9 billion, are taxable or not is one of the bigger questions the IRS has to answer.
Taxpayers anticipating a refund might be feeling antsy about filing, especially as the cost of many consumer goods keeps rising. Meanwhile, two of the biggest tax-preparation companies, H&R Block and Intuit-owned TurboTax, continue to file returns for clients despite the IRS request to hold off.
For taxpayers with questions regarding the status of rebates and refunds, the IRS says, "the best course of action is to wait for additional clarification on state payments rather than calling the IRS.” And as anyone who has attempted to call the agency can probably attest, there is wisdom in that advice.