It's a chaotic kickoff to tax season. A week after telling millions of taxpayers to hold off on filing their returns so it could work out some last-minute questions, the IRS gave the go-ahead Friday.
At issue was whether or not special payments made by 21 states throughout 2022 would be taxed. These include many of the one-time assistance payments and tax rebates, such as California's middle-class tax refunds worth up to $1,050 and Maine's $850 pandemic relief checks.
The IRS now says taxpayers in "many states will not need to report these payments on their 2022 tax returns." That's good news for those recipients who won't face surprise tax bills, but it's unclear why the agency didn't determine this before the tax season started. As of Feb. 3, nearly 19 million people had already filed their 2022 returns, according to the IRS.
"The IRS must issue guidance and provide education in a proactive and timely manner," Erin Collins, the national taxpayer advocate, wrote in a blog post. "Timely guidance…is key to eliminating confusion and frustration for taxpayers and tax professionals, earning the trust of the American people, and providing quality service."
Taxpayers in California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island will not need to report the payments. Alaska’s Energy Relief Payment also won't be taxable.
Other states, including Georgia, Massachusetts, and South Carolina, have more nuanced instructions, which taxpayers can read about on the IRS's website. Some of the payments issued in Illinois and New York are also taxable.
Thanks to excess federal COVID-19 stimulus funds, many states gave residents one-time payments or tax rebates to help them hedge against inflation last year. Some states, including Michigan, might do the same this year.
If taxpayers have already filed their returns and reported the excepted payments as income, then they may have to file an amended return, Collins writes.
"That means they will need to spend time and money to file amended returns and then wait for their refunds, and it means the IRS will have to devote resources to processing amended returns and issue refunds," she writes.
Smaller tax refunds expected this year
Many people should expect smaller tax refunds this year due to a variety of expired COVID-19-related tax changes.
There were no federal stimulus checks doled out in 2022 like there were in 2020 or 2021. The expanded Child Tax Credit (CTC) reverted to its pre-2021 amount, and many families no longer qualify at all. The child and dependent care tax credit also reverted to its less generous pre-2021 amount. And filers can no longer deduct charitable contributions up to $300 (or $600 for couples) without itemizing, as they could last year.
The past few years have put the IRS to the test. COVID-19 tax changes and one-time payments put a strain on the understaffed agency, leading to historic backlogs of returns to process. By the end of 2022, the agency had about 400,000 individual paper returns left to process, which was significantly less than the backlog of the previous two years.
Not only are those filers still possibly waiting on their refunds, but the backlog slows down this year's process as well. The IRS is warning taxpayers that if they file a paper return, it may take up to six months to receive a refund. E-filers can typically get their refunds much more quickly.
Taxpayers can still use the agency's Where's My Refund? tool to get updates after they file.
