The IRS indicates that many state refunds are not federally taxable. Some may struggle to file their returns, warn tax experts

The IRS on Friday released federal tax guidelines for millions of Americans who received state refunds or payments in 2022.

The announcement came about a week after the agency urged those taxpayers to put their filing on hold while it determines whether the funds are taxable on federal returns.

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

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 will not 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 can also skip federal tax filing for certain payments. But eligibility may depend on factors from your previous tax returns.

“It’s the right decision by the IRS,” said Adam Markowitz, enrolled agent and vice president at Luminary Tax Advisors in Windermere, Fla. “It’s unfair to punish taxpayers so late in the game if they were to change anything.”

However, he said there may be challenges for California taxpayers, as the state had already issued them 1099-MISC forms for payments over $600, which reported the “tax refund for the middle class” from the state as a taxable payment to the IRS.

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

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

If the state does not amend and reissue these forms to the IRS, it can lead to inconsistency when California taxpayers file their federal returns, he said.

Typically, an inconsistency between tax forms and returns triggers automated notices, which can delay refunds or require taxpayers to contact the IRS to resolve the issue.

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