Over 16 million taxpayers from states like California should hold off on filing their taxes because of extra stimulus checks, the IRS says
In 2022, some states opted to give residents checks or tax rebates to offset the cost of inflation.
Now, the IRS is looking into those payments and their taxability, and advising taxpayers who received them to wait on filing their federal returns.
Waiting on guidance might mean taxpayers get refunds later, since they had to wait to file.
Last year, to offset rising costs, many states stepped in to give residents some extra money in their pockets. Now, it's unclear whether those checks might lead to a surprise tax burden, and even the IRS isn't sure.
In a statement on February 3, the agency said it was "aware of questions involving special tax refunds or payments made by states in 2022," and said it was "working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers."
In the meantime, the filers who received checks should hit pause and wait to file their federal returns. The IRS said that, for filers who aren't sure whether their state payments will be taxed, they recommend waiting until there's more guidance.
"For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS," the IRS said in its statement. It also does not recommend submitting an amended return for 2022.
Insider reached out to the IRS to ask if it had any additional guidance; they did not immediately respond.
As the Wall Street Journal reports, that question of checks being taxable will particularly fall on the shoulders of Californians. By the state's accounting, its Middle Class Tax Refund — which ranged from $350 to $1,050 — reached over 31 million taxpayers and dependents. The state distributed around 9.5 million debit cards, and made just under 7.2 million direct deposits; that adds up to over 16 million payments that could be affected by the IRS' new guidance in California alone.
Per the Wall Street Journal, some confusion abounded after Californians who got over $600 received 1099-MISC tax reporting forms, which are typically used to report income from things like royalties or prizes. But, even so and despite the IRS' guidance, H&R Block and TurboTax are still filing for taxpayers who received the payments, holding the belief that the checks from the state are not taxable, according to the Journal.
California isn't alone in issuing one-off payments. At least 18 states sent out checks or offered rebates to some residents, with many citing high inflation and robust state coffers as reasons to distribute more.
Now, though, that assistance might mean filers have to wait before they finish their taxes. For many, waiting to file is more than just putting off a burdensome task. It will also keep filers from their refund checks for longer, which, while likely to be smaller this year, are still an important economic lifeline for many. With the IRS still struggling against a backlog of returns, many filers in recent years found their checks delayed by months, leaving them scrambling to cover essential bills. And, with many states targeting their checks by income, that could mean lower-income residents will have to wait even longer before receiving a refund.
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