Last Friday, February 3rd, The IRS sent out a statement asking millions of taxpayers in 22 states who received tax rebates last year to hold off on filing their 2022 taxes. The agency is seeking to clarify whether those tax rebates and special refunds are considered taxable income. The IRS has also stated that it is not recommended to amend a previously filed 2022 return, as amended returns have been caught up in the IRS' backlog, leading to processing delays.

About 16 million California residents received the "middle-class tax refund" checks of $350 per eligible taxpayer last year as a part of a relief package designed by the state to help residents cope with soaring inflation at a time when the state had a budget surplus.

At least 22 states authorized tax rebates last year as their coffers were buoyed by strong economic growth and federal pandemic aid, according to the Tax Foundation. The following states sent rebate checks to at least some of their taxpayers last year: Alaska, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, South Carolina, and Virginia.

Last year, the average tax refund for the 2021 tax year was about $3,200, a 14 percent jump from the prior year, an amount larger than the typical worker's paycheck. Last year's rebate checks are throwing a wrench into tax season for millions of Americans, many of whom count on getting timely tax refunds to pay down debt, make a purchase, or get on top of bills.

Some believe that the uncertainty revolving around this year's tax filing is unfair to taxpayers. While tax experts have long known that the taxability of state rebate payments would be an issue, the IRS remained silent until February 3rd, at which point they essentially said we'll get back to you soon. Adding to the confusion for taxpayers is that the federal government's tax rebates — sent in the form of three stimulus checks during the pandemic — were not considered taxable income by the IRS.

Some taxpayers took to social media to express their frustration at the IRS guidance that they should delay filing their tax returns. The agency started accepting returns for this year's tax season on January 23rd. The IRS issued the guidance after Rep. Kevin Kiley from California wrote to the tax agency to say that his office had been contacted by many constituents asking for help on the issue.

Talley's team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.