With tax season in full swing, it’s time to go through your annual expenses and ensure that the government has taken and received its fair share. None of us like it, but it’s just the way things are. But for those in a few states, what is considered taxable income and what is not may be rather questionable.
As you well know, most states have offered some sort of help to residents concerning inflation throughout the last year or so. It might not be much, but thanks to rampant prices on just about everything, every little bit counts, right?
Naturally, as a form of income, some of you might expect that this money should be reported on your taxes this year. You know, just like receiving the federal child tax credit is. However, since this is kind of a new thing, the IRS wasn’t exactly sure just how this form of income should be classified or even if it should be taxable.
And so, you might have heard that for the 21 states who offered such financial assistance, residents were asked by the IRS to hold off on sending in their taxes until the agency could figure out precisely what to do.
Well, they’ve officially made their decision.
For the most part, it’s good news.
According to The New York Times, the IRS has chosen not to tax most of these government handouts. The logic behind this is that payments for disaster and welfare are not taxable according to IRS law, and so most of these payments count as such.
I say most because not all 21 states fall under the same classification.
For people in 16 of those states, which include California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island, those payments do not need to be reported to the IRS on your 2022 tax return as they are not taxable.
Alaska, similarly, sent out payments, both supplemental and energy relief bonuses, that will not be taxed.
However, things get a bit trickier for people in Georgia, Massachusetts, South Carolina, and Virginia.
According to the IRS, “For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.”
Basically, it comes down to the fact that these four states called their bonus checks “refunds.” And the IRS treats these differently.
For vice president of state projects at the Tax Foundation Jared Walczak, it’s a bit problematic. He doesn’t really understand why the IRS, which has been rather generous and “pro-taxpayer” in most states, has suddenly taken a “more formalistic interpretation” in these four.
However, as Adam Markowitz, vice president of Luminary Tax Advisors in Windermere, Florida, says, the IRS was right to make the distinction. According to him, the IRS can’t be going around and changing the rules on how refunds and such are treated this late in the game.
Of course, there are some very real problems made by this decision.
Problem number one is the lateness of the hour in which it was made.
Given that states didn’t know how the IRS would handle these bonus checks, they went ahead and sent out 1099-MISC forms to everyone who received such payments. So anyone who files a return, including these forms, will have a mismatch on their federal returns regarding income. And if you didn’t know, mismatches can slow refunds considerably.
It may also be a problem for a number of residents in Maine, where some 100,000 tax returns had already been filed on Thursday, the day before the IRS clarification was made. Even without a 1099-MISC to prove this source of nontaxable income, a mismatch still might be seen on several returns.
As Maine’s Democratic state Senate President Troy Jackson says, this uncertainty and lateness on the part of the IRS are just “harmful and irresponsible.”