Just seven days after it told 75 million taxpayers to put the brakes on filing their federal returns, the Internal Revenue Service said it had resolved its indecision about the holdup.
The tax agency said individuals in California, Florida and more than a dozen other states wouldn't owe federal tax on state rebates and refunds they received last year as inflation soared and state budgets showed surpluses.
"During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief," the agency said in its Feb. 10
The news cheered accountants and financial advisors.
"THANK GOD WE GOT GUIDANCE for the state tax refund treatment," emailed Dan Herron, a certified public accountant and personal financial specialist, the accounting profession's answer to the certified financial planner credential, in San Luis Obispo, California. "That was holding up a bunch of returns that we could actually file."
The IRS threw the annual filing season into chaos on Feb. 3 when it
Around 75 million taxpayers have been affected by the IRS's confusion,
The nation's collector said that people in California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island don't have to enter their 2022 payments on their federal returns.
While Alaska is in this group as well, the IRS issued special instructions for its residents, who must declare payments stemming from the state's Permanent Fund Dividend and "any payments" that were "provided as compensation to workers." The fund, supported by dollars from oil reserves, is a kind of universal basic income for residents and paid out
People in Georgia, Massachusetts, South Carolina and Virginia won't have to include state payments on their returns if the money was a refund of state taxes paid and the recipient either claimed the standard deduction or itemized their deductions but did not receive a tax benefit.
One issue is that taxpayers who already filed their returns and reported the rebates will likely have to file an amended return to undo the damage. For decades, those documents had to be filed on paper, a bureaucratic process that fueled processing delays and logjams. But starting in 2020, the IRS allowed
On a separate front, accountants and advisors were jolted by
The lucrative ERC credit is refundable, which means that any amount exceeding a business's tax liability is sent to the owner as a cash refund. It has also been a magnet for fraudsters running credit "mills." While
That it's making new noises annoyed Herron.
"Why do this now? You've had a couple years to determine how this would be treated tax wise," he said. If California decides to tax the credits, "that would mean (potentially) that we would have to go back and amend those returns (potentially again) to account for the additional income on the California side," he added. And that "only leads to pissed off taxpayers" who have to pay to file amended returns.
