IRS Decision Not to Tax Certain Payments Carries Fiscal Cost

“The I.R.S. is right not to insist on strict applications of the rules given the need to resolve the uncertainty without further disruption,” said Jared Walczak, the vice president of state projects at the Tax Foundation.

Kim S. Rueben of the Tax Policy Center, a liberal-leaning think tank, said that the Biden administration had probably weighed the impact that taxing the payments would have on less wealthy Americans against the additional revenue that would be generated. Deeming the payments as taxable income, she said, might have affected eligibility for other government benefits like food stamps and Medicaid.

“The people that this is most useful for, in my mind, are lower-income families, who may not have had much of a tax liability in the first place,” she said.

Ultimately, the I.R.S. deemed payments from 16 states not taxable. Some rebates were narrowly tailored, like $35.5 million to about 59,000 families with children in Florida, while others covered nearly every taxpayer in a state, like the $9 billion paid to more than 31 million residents in California.

Taxpayers in Alaska do not need to report a one-time energy relief payment on their tax returns, but do need to report the regular dividend the state sends to residents.

Residents in four other states — Georgia, Massachusetts, South Carolina and Virginia — do not need to report payments if they take the standard deduction, but do if they itemize. The I.R.S. reasoned that these four states structured their payments as refunds, rather than rebates.

Mr. Walczak estimated that the affected filers in those four states accounted for just 2 percent of the payments’ value nationally, and he criticized the agency for having singled out those who itemize their taxes as arbitrary.

“It would be fair for taxpayers to ask why the I.R.S. did not make a blanket statement of nontaxability,” he said.

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