Macroeconomic headwinds, historically high inflation, and rising interest rates sent many struggling Americans scrambling to file their tax returns as early as possible, in hopes of getting a much-needed refund. Indeed, the Internal Revenue Service (IRS) reported that by early February it had received nearly 14% more returns than it had compared to the prior year.  

Normally, getting a tax return submitted ahead of the inevitable rush is a good thing, but due to certain guidance that was issued late, millions of taxpayers may have inadvertently paid more in taxes than they should have. As a result, the IRS has taken the unusual step of urging millions of early filers -- particularly those who submitted their federal tax return before Feb. 10 -- to consider filing an amended return. 

The issue involves a late determination regarding the federal tax treatment of state-issued rebates and one-time tax refunds.

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State-issued refunds and rebates

In 2022, a broad cross-section of states issued payments to taxpayers to help those suffering from 40-year-high inflation, which resulted in skyrocketing prices at the gas pump and in the grocery aisle.

Because of the large number of states issuing these payments and the complexity of the various tax laws in play, the IRS delayed providing guidance until after the onset of tax season. Taxing authorities began accepting returns for the 2022 tax year on Jan. 23, 2023. The IRS issued a final ruling on the payments on Feb. 10, "clarifying the federal tax status involving special payments made by 21 states in 2022."

Unfortunately, taxpayers who filed their return at that beginning of tax season -- before this determination was issued -- may have paid too much in federal taxes.

Who should consider filing an amended return?

In a press release on Tuesday, the IRS reminded taxpayers in a number of states that these payments didn't need to be reported as income on their 2022 tax return. 

These states included:

  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Maine
  • New Jersey
  • New Mexico
  • New York
  • Oregon
  • Pennsylvania
  • Rhode Island

The statement said that Alaska is in this group as well, but that the determination applied "only to the special supplemental Energy Relief Payment received."

Federal taxing authorities also said that residents of Georgia, Massachusetts, South Carolina, and Virginia didn't need to declare their special state tax refunds as income for federal tax purposes if they met certain requirements. For these individuals, the state payments aren't included for federal tax purposes if the payment is a refund of state taxes paid and the recipient either claimed the standard deduction for tax year 2022 or itemized their tax year 2022 deductions but did not receive a tax benefit.

Now what?

The IRS provided a comprehensive list of the relevant state payments. Taxpayers who live in these states, filed a return before Feb. 10, and meet these requirements are being urged to review their federal tax return to see if an amended return is appropriate.

Those who submitted their 2022 tax return electronically are advised that they can also file an amended return electronically and use direct deposit for any resulting refund. Furthermore, those who used a tax professional can consult with them to help decide if an amended return is necessary. Additionally, taxpayers can always submit a paper version of IRS Form 1040-X, Amended U.S Individual Income Tax Return, and receive a paper check in the mail, as direct deposit is not available to those submitting paper returns.