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IRS Tax Refund chaos: Who are the affected taxpayers?

Tens of millions of people received inflation relief payments during 2022, sparking questions about the tax situation for the state-funded support.

IRS outlines tax refund filing situation

Throughout 2022 Americans were still suffering through the economic consequences of the pandemic and inflation was running at historically high levels. In response to this situation a number of states and local authorities opted to send direct financial support to residents, in the form of tax refunds.

The most widespread of these programs was California’s Middle Class Tax Refund, but more than 20 states in total made similar payments. However because they were authorised and distributed by local authorities, there was huge uncertainty about whether they should be subject to federal taxation.

At the start of February the IRS told recipients to hold off on submitting their tax returns while it decided whether or not to tax the payments. On 10 February the tax agency issued new guidance, confirming that most taxpayers will not need to report the payments on their 2022 tax returns.

Do I need to pay tax on relief payments?

The IRS has been roundly criticised for leaving this decision so late, forcing filers to delay their submission and extend the wait for tax refunds. However, the tax agency has finally arrived at a resolution that will please most people affected.

The IRS statement reads: “People in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.”

Relief payments issued by the state of Alaska are also included in the group, but not the annual payment of Alaska’s Permanent Fund Dividend.

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The pandemic relief payments are not subject to taxation at the federal level because they are excused under either the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Most of the relief payment issued during 2022 were covered under the pandemic emergency declaration.

However President Biden has confirmed that the declaration will not be extended once it comes to an end this year, meaning that this is the last year when these types of payments will be exempt from federal taxes.

The tax agency confirmed that “in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax year”.