The Internal Revenue Service dithered for days to guide on whether the state inflation relief tax rebates and stimulus checks would be considered income and be subject to federal taxes. the agency had initially asked filers who were not certain of the status of their state payments to put off filing their returns.
This advice by the IRS went out to those residents in states that have sent out inflation-linked stimulus checks. There needed to be more certainty about how these payments were treated in the 21 states that sent out various forms of inflation relief including direct transfers, paper stimulus checks, tax rebates, and gas and transit cards.
Most states went for state stimulus checks or tax rebates after a huge revenue surplus. They were also helped by relief payments enabled under the American Rescue Plan Act of March 2021.
The Rescue Plan relief funds for state, local, and tribal bodies also helped states send out stimulus checks from funds that were primarily meant for pandemic relief work.
Stimulus Checks Generally Not Taxed By IRS
Generally, stimulus checks issued by states in special cases are not usually taxed b the federal government or even the government that issues them, for instance, the states in this case. For example, the Middle-Class Tax Rebate declared by California is not treated as taxable income by the Golden State. While the federal Economic Impact Payments, three rounds of which were sent out starting immediately after the pandemic, were not subject to taxes, so were the expanded version of the Child Tax Credit stimulus check.
But the matter of tax on stimulus checks gets more complicated when it crosses jurisdictions. The agency will in all likelihood consider the nature and purpose of the relief package offered by every state to determine the federal tax treatment. For example, it means that the type or relief provided by one state may be subject to taxes while that provided by another state may not be taxable.
The IRS finally cleared the confusion over federal income tax on state stimulus checks in over twenty states. The agency had previously asked taxpayers in the states that gave out inflation relief payments to put off their returns until they determined whether the payments were subject to federal taxes.
Finally, the Internal Revenue Service disclosed that it would not collect federal income tax against the inflation relief stimulus checks issued by around 20 states through 2022. The payments went out to beneficiaries in the form of tax refunds, direct bank transfers, and paper stimulus checks. it came as a much-needed reprieve for tens of millions of residents of these states.
The IRS had previously asked files to hold off filing their returns as officials were undecided in determining if the state inflation relief stimulus checks were federally taxable. it was an unusual statement from the agency that has consistently called filers to submit their returns as early as possible at the start of the filing season. This helps avoid various hassles associated with last-minute filings.
The tax filing season started officially on January 23 this year. The announcement after more than two weeks meant that tax filers in over 20 states can file their returns now. Such residents will not have any income tax collected against the tax refunds or stimulus checks. they will also not have to report such income in their returns. this order by the IRS will benefit residents of California, Connecticut, Colorado, Florida, Delaware, Alaska, Hawaii, Idaho, Indiana, Illinois, New Jersey, Maine, New York, New Mexico, Rhone Island, and Pennsylvania.
The agency has stated that the stimulus checks and tax rebates that went out from such states were for disaster management or for promoting the general welfare of its residents. Such funds, it stated, are not taxable under federal laws.
But residents of Virginia, South Carolina, Massachusetts, and Georgia will have to declare the payments, and it will be deemed as income. That is unless the recipients claimed standard deduction, or itemized deduction, but failed to receive any tax benefits, the agency declared.
The states were helped along by the American Rescue Plan Act funds which were signed in March 2021 by Democratic Party President Joe Biden immediately after he came to power a couple of months earlier.
The states are also flush with excess revenue thanks to an economic boom in the last two quarters of 2021.
California remains among the few states that have sent out multiple stimulus checks during and after the pandemic. The Golden State stimulus check I and II has been followed by the Middle-Class Tax Refund, which gives out $200 to $1,050.
The Middle-Class Tax Refund was the biggest of its kind as it sent out stimulus checks to 23 million of the 40 million population of the Golden State. The payments were linked to the 2020 Adjusted Gross Income of residents.
Residents had also to file the state income tax returns by October 17, 2021, to be eligible for the refund. Residents with an individual AGI of more than $250,000 and married couples filing jointly with a combined AGI of more than $500,000 did not receive the fund.
Over 16 million residents have already received the payout. The New York stimulus check sent out $270 to low and moderate-income residents and enacted property and rent relief for residents of certain categories.
Oregon also sent out one-off payments worth up to $600. Georgia on the other hand gave a $500 credit to residents who submitted their income tax returns for 2021.
The decision by the IRS to waive federal income tax on state inflation-linked stimulus checks came on the day the IRS reported a spike in service numbers. Treasury Dept. officials said that the agency has a high incidence of answering calls which stood at an all-time high of 88.6% against a mere 13% of calls answered in 2022.
The Inflation Reduction Bill, which received the backing of President Biden has backed the IRS with $80B in extra funds spread over a decade to strengthen tax enforcement and improve services.
