IRS says many state rebates aren’t taxable at the federal level. Some may face filing struggle, tax pros warn

Taxpayers in more than a dozen states won’t need to report these payments on federal tax returns.

The IRS on Friday issued federal tax guidance for millions of Americans who received state rebates or payments in 2022.

The announcement came about a week after the agency had urged those taxpayers to hold off on filing while it determined if the funds are taxable on federal returns.

“The IRS has determined that in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns,” the agency said in a statement.

The agency said taxpayers in California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island won’t need to report these payments on their federal tax returns. Some Alaska taxpayers may also avoid federal levies on certain payments.

Taxpayers in Georgia, Massachusetts, South Carolina and Virginia may also skip federal tax reporting for some payments. But eligibility may hinge on factors from your previous tax filings.

Californians may still face filing challenges
“This is the right ruling by the IRS,” said Adam Markowitz, an enrolled agent and vice president at Luminary Tax Advisors in Windermere, Florida. “It’s unfair to punish taxpayers this late in the game if they were going to change anything.”

However, he said there may be challenges for California taxpayers because the state already issued them 1099-MISC forms for payments of more than $600, which reported the state’s “Middle Class Tax Refund” as a taxable payment to the IRS.

More than 16.5 million California taxpayers have received the payment, according to the state’s Franchise Tax Board. Overall, more than 31.6 million residents benefited including taxpayers and their dependents.

“The state of California really did everyone a disservice by issuing 1099-MISC [forms],” said Dan Herron, a San Luis Obispo, California-based certified financial planner at Elemental Wealth Advisors. He is also a certified public accountant.

If the state doesn’t amend and reissue those forms to the IRS, it may cause a mismatch when California taxpayers file their federal returns, he said.

Typically, a mismatch between tax forms and returns triggers automated notices, which may delay refunds or require taxpayers to contact the IRS to resolve.

“I don’t know how the IRS system is going to handle that,” Herron added.