In an effort to extend COVID relief, several states issued rebate checks to residents in 2022. Some states decided to issue the rebates by reporting budget surpluses while others aimed to continue relief for those taxpayers below certain income levels.
States affected include California, Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Maine, New Mexico, South Carolina and Virginia.
The current debate is over the taxability of the rebate payments.
Historically, state refunds are taxable only to the extent that the taxpayer itemized their deductions in the previous year. In other words, if the taxpayer received a prior benefit for state income taxes paid, that benefit would need to be reduced when any portion of the original expense was refunded back to them.
In this case however, these checks are really refunds of amounts that taxpayers were previously required to pay. Similar to the Federal COVID relief, stimulus checks however, the IRS does need to actually determine the taxability of the rebate funds.
The IRS is expected to provide more guidance this week with respect to as many of the impacted states as possible. Until the guidance is issued, it is recommended that residents of those states who received funds from these programs hold off on filing their 2022 income tax returns.
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