Even as Americans grappled with the relentless rise in all round prices, more than 20 states stepped in with various forms of inflation relief stimulus checks. The states sent out stimulus checks to millions of eligible residents in 2022. But the payments, given various terms by the states, have raised questions about whether the payments would be subject to federal taxes.
The IRS itself appeared confused initially as it advised filers to wait until they gave clear instructions. Even weeks into the tax season, the IRS urged people in at least 19 of the states to hold off filing their income tax returns. The reason the federal tax authority assigned was that it was still figuring out how to classify the tax refunds, inflation relief stimulus checks, and other support that the state administration issued through 2022.
IRS Pointed To The Complexity Of The Inflation Stimulus Checks For The Delay In Its Decision
Most of the payments were marked inflation relief stimulus checks by the state authorities, but even at a basic level, they point to a hodgepodge of eligibility requirements and rules.
Taxpayers across America, and mostly along the East and the West Coast found themselves facing this predicament even as the IRS worked to apply the rules and work out a uniform solution to a wide range of inflation relief programs.
The agency kept pushing back news of any final clarification, but it finally got around to giving its decision to as many states and taxpayers as possible. The IRS initially said that the rules involved were complex and so filers too should not expect a simple solution applicable to all states.
But the authorities also suggested that people who have completed filing their 2022 federal income tax returns in 2023 need not be unduly perturbed. It stated that they would advise against amending any income tax returns filed for the 2022 tax year.
Working Of The States Stimulus Check Programs
Residents of many of the states that gave out inflation relief payments received the stimulus checks and tax credits without having to make a fresh application. The payments went out through inflation relief programs and broad stimulus.
While some of the programs set income limits as one of the deciding criteria, others set money for all residents of the states who filed their state income tax returns on time for the previous year.
Some of the states, such as Illinois, issued income tax rebates that were tied to criteria that included payment of state property tax. On the other hand, Rhode Island and Florida singled out a household that had dependent children, both biological and adopted.
California is giving out stimulus checks to 23 million of its residents, covering close to 60% of the state population. It has set up the Middle-Class Tax Refund stimulus checks in three tiers. Residents with individual Adjusted Gross Income of $250,000 and above and married couples filing jointly and with a state AGI of $500,000 and above for the 2020 tax year will not receive any stimulus checks. The stimulus check amount for the Middle-Class Tax Refund ranges from $200 to $1,050 and decreases as the AGI increases for the single or joint filers.
The highest amount goes out to filers with an individual AGI of $75,000 or less for individuals and doubles the amount for married couples filing jointly. Each filer in this category received $350 each plus another $350 if they included any dependents in the 2020 state income tax return.
Thus, a joint filer with an AGI below $150,000 for 2020 will receive the highest amount of $1,050 if they have included a dependent in their income tax returns. The breakup comes to $350 for each filer plus another $350 for any dependent. The amount sanctioned for a dependent remains fixed at an amount equal to that given to the filer irrespective of the number of dependents declared.
IRS Finally Comes Clear On Federal Tax On Inflation Relief Stimulus Checks
The IRS finally offered some good news to residents of around 20 states including California, New Mexico, and Maine. It announced the federal tax status of special payments made by 21 states during 2022. The inflation relief stimulus checks and tax rebates went out in varying amounts under varied programs to eligible residents in these 21 states. Some of the state stimulus check relief payments came in many states from pandemic-related state budget surpluses.
Such funds were given to states under the American Rescue Plan Act of March 2021 signed by President Biden immediately after he came to power in January 2021. These support funds to states, local bodies, and tribal bodies helped the states and other groups give out payments to residents when prices went through the roof in 2022.
The absence of federal stimulus checks in 2022 with the end of the expanded Child Tax Credit stimulus check in 2021 made matters tough for low and moderate-income Americans battling the relentless price rise across products and services.
The states were helped along by a huge budget surplus thanks to an economic boom in the last two quarters of 2021. The combination of these funds helped them decide on support for residents through 2022.
The tax situation that surrounded such varied and widespread payments was described as being complex and unique by the IRS. The IRS has recently instructed taxpayers receiving special payments to wait till it reached a decision. But finally, after a long-drawn review, the federal tax authorities have declared that they will not challenge the taxability of most of the special state stimulus check and tax rebate programs.
The agency revealed that they had determined that state taxpayers in the 20-odd states will not have to report such payments on their income tax returns for 2022, to be filed in the first quarter of 2023. They said that this was being done in the interest of sound tax administration and also other factors.
The IRS announced that its order covers various categories of the payments sent out by the states in 2022, and which continues into 2023. The authorities said that it will not challenge the special state payments that were made in 2022 and related to disaster relief and general welfare. But some state stimulus checks, among the 21 could be taxed, though the details will be revealed later.
