IRS Reverses Course On Decision Affecting 20 Million Californians

The good news? The Middle-Class Tax Refund given out to millions of Californians in 2022 won’t be subject to federal taxation.

The bad news? Millions of Californians no longer have an excuse to put off filing their taxes.

Last week, the IRS had urged more than 20 million Californians to hold off on filing their 2022 tax returns while the agency figures out whether to tax the “Middle Class Tax Refund.”

Friday’s announcement was an eagerly awaited decision likely to provide relief to middle-class Californians and end confusion dominating the 2022 tax season.

“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 IRS announced late Friday afternoon.

“During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that 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.”

The rebates, ranging from $200 to $1,050, went out to millions of Golden State taxpayers who earned less than $250,000 individually or $500,000 jointly the year before. That’s most Golden State taxpayers.

California is one of 19 states with diverse programs last year offering inflation relief payments or refunds for taxes.

True to form, the IRS issued a long and complicated explanation for the decision not to tax the one-time rebate:

“The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined 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, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return,” the IRS announced Friday.

Prior to Friday’s announcement, filers across the country were in limbo and tax accountants expressed increasing frustration.

“We are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers,” the IRS had said in response to the confusion. The agency advised people not to file early to avoid the risk of having to file again after a decision was reached.

“I think the IRS is trying to help people save another filing if they had to do an amended return,” Keith Hall, president and CEO of the National Association for the Self-Employed, told The AP.

However, many tax accountants found the delay untenable.

“Giving taxpayers a choice between waiting to file their returns and receive their refunds or filing returns now that the IRS may later determine to be inaccurate is not acceptable,” the National Taxpayer Advocate, an independent division within the IRS, said in a blog post quoted by The Los Angeles Times. “This was a known issue, with ramifications for tens of millions of taxpayers, tax return preparers (who still prepare most federal income tax returns) and tax software developers. The failure to have identified and resolved this issue before the filing season suggests that someone, or everyone, was asleep at the switch.”

The 2022 federal income tax filing deadline is Tuesday, April 18.

• Related: What To Know About Filing Your 2022 Tax Return

The Associated Press contributed reporting