Here's Why the IRS Says You Should Hold Off Filing Your 2022 Tax Return

The Internal Revenue Service (IRS) says you might want to hold off on filing your tax return in 2022 if you qualify for special checks or rebates as a result of either tax surpluses or inflation in 2022. An IRS spokesperson told Trade Algo that the agency is currently clarifying whether these special state tax rebates are to be taxed at a federal level.  

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As a result of "complex rules surrounding them", it will take additional time to determine the tax implications of the new law, according to a statement from the Internal Revenue Service. “We expect to be able to provide additional clarity to as many states and taxpayers as possible by the end of next week."

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For taxpayers who qualify for relief checks, the IRS recommends that they wait until “additional guidance is available or consult with a reputable tax professional.” 

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It was also recommended by the IRS that those who have already filed a 2022 tax return not file an amendment to that return.

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There is no clear indication of which specific states will require more guidance, but at least 18 states are enacting one-time refunds in 2022, according to the Urban-Brookings Tax Policy Center: Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, and the District of Columbia.

Oregon, Rhode Island, South Carolina, and Virginia, as well as Massachusetts, New Mexico, and New York. Tax Policy Center senior policy associate Richard Auxier says most of those 18 states are still waiting to confirm whether federal taxes will be incurred on the rebates.

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Based on Trade Algo's analysis, the federal taxation of rebates will be based on both federal law and the stated purpose for each rebate. There is a possibility that rebates that are related to inflation relief or tax surpluses may qualify for federal taxation if they relate to stimulus payments related to Covid-19 relief. It is also important to note that each state's relief program is run differently, which adds to the confusion of the situation.

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As an example, the Franchise Tax Board of California has announced that a special Middle-Class Tax Refund meant to cover the cost of rising inflation in the state will not be taxed by the state. On the other hand, it acknowledges that the funds could be subject to federal taxation as well. 

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In the same way, the New Mexico Taxation and Revenue Department have announced that no state taxes will be charged on refundable income tax rebates meant to cover rising costs by 2022, according to the department's website. There is, however, also a statement on the site that states that "the department cannot comment on the impact of rebates and relief payments on federal tax obligations.". 

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It may be a good idea for tax filers who have qualified for relief checks or tax rebates to wait until the IRS gives them more guidance before filing if they haven't already.