The decision by the Biden administration and the IRS to allow Americans to not list state-issued tax relief checks as income is being seen as a failure to generate revenue. The choice to not collect the much-needed tax money could end up contributing to already high inflation rates which are cooling slower than expected.
This is the second opportunity the government passed on in recent months to raise funds. As The New York Times reports, in December, the IRS decided to allow digital wallet users to delay the requirement of reporting their transactions via apps like Venmo and Cash App as income on a 1099-K form until next year (if they had more than $600 in transactions).
The decision to waive federal taxes for most state stimulus check payments means the government is missing out on $4 billion in funds. The postponement of reporting digital wallet earnings would have made the federal administration a projected $1 billion, per the NYT.
Although most state stimulus recipients likely spend their payments shortly after receiving them, there is a worry that not taxing them means more money for people to spend, which runs counter to the Federal Reserve’s inflation reduction plan. The Fed’s favored indicator of inflation, the Personal Consumption Expenditures price index, unexpectedly climbed from December to January and rose 5.4% in January year-over-year, according to Commerce Department data.
As far as collecting revenue is concerned, proponents of government tax relief claim that the $4 billion waived from taxing state stimulus checks is a relatively small drop in the revenue bucket compared to the $1.47 trillion that the U.S. government has collected in fiscal 2023, according to the Treasury Department’s Fiscal Data site.
It’s even less of a crucial money-maker when you take into account the U.S. national debt of $31.4 trillion. But the decision to waive state stimulus payment taxes ultimately may have come down to common sense — if the government didn’t declare EIPs as taxable income, it would be odd for it to do so for state stimulus checks.
“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, vice president of state projects at the Tax Foundation.
Taxpayers in the following states will not have to report 2022 “general welfare and disaster relief” payments on their tax returns: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.
Aid recipients living in Georgia, Massachusetts, South Carolina and Virginia will need to pay taxes on state-issued stimulus checks if they itemized deductions and received a tax benefit from those deductions in 2022 as they are considered “refunds of state taxes paid,” per the IRS (Alaska residents will only need to pay a percentage for their state’s Permanent Fund Dividend).
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