Most taxpayers in states that gave some kind of stimulus or tax rebate payment last year will not have to report them on their federal returns this year. However, some residents in four states will have to.
“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 (for example, because the $10,000 tax deduction limit applied) the payment is not included in income for federal tax purposes,” the IRS said. In those states, it will “fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted,” according to the guidance.
Officials in Georgia, Massachusetts, and Virginia issued statements to taxpayers this month, warning them they could have federal tax payments after the IRS issued its guidance, reported Bloomberg. The South Carolina Department of Revenue has not commented on the revision.
“Taxpayers who took the standard deduction on their federal tax forms will not have their refunds subject to federal taxation,” the FAQ states. “Taxpayers who took the itemized deduction but did not receive a tax benefit will not have their refunds subject to federal taxation.”
But the Georgia agency stipulated that “taxpayers who took the state and local tax deduction (SALT) on their federal return and received more than the refund they would have otherwise with the standard deduction will have their refunds subject to federal taxation.”
“If you itemized your 2021 deductions, include the special refund, in your gross income to the extent you received a federal tax benefit from the 2021 deduction. The federal tax benefit received, if any, depends on your specific tax situation,” it says.
According to Bloomberg, officials in Massachusetts and Virginia stated taxpayers who got a refund in 2022 for taxes paid in tax year 2021 will receive or have received form 1099-G, which can be reported on their federal taxes this year.
Why?
It boils down to how states defined the payments, said Tax Foundation vice president Jared Walczak in a recent Yahoo Finance interview.“The IRS has singled out these four states because they structured their rebates as tax refunds,” Walczak said. “And therefore the IRS is regarding them as a reduction of net state tax liability.”
Meanwhile, Walczak told Bloomberg that the agency is essentially penalizing taxpayers in those states.
“This ‘problem’ applies to all 21 states, not just the four that structured their payments as ‘refunds’ rather than rebates,” he said. “The IRS is taking a formalistic interpretation that four states’ payments offset tax liability, while all the others did not, even though they are functionally equivalent.”
And Walczak noted that the IRS did not include guidance to individuals in these states who may have already filed their returns before the IRS issued its guidance. The tax agency on Feb. 3 called on taxpayers to hold off on filing their taxes until the guidance was issued on Feb. 10.
“Any affected taxpayers who have already filed and did not include their tax refunds as taxable income will be required to file an amended return,” he said.
