The IRS is urging taxpayers in Maine and 18 other states to delay filing income tax returns until the agency decides whether state relief payments issued last year are going to fall under federal taxes.
A ruling that taxes the $850 checks would put the administration of Gov. Janet Mills in a jam, as well as potentially 100,000 Mainers who have already filed state returns.
The Mills line: The state did not check with the IRS while designing the $850 relief program, the Portland Press Herald reported today. But the Democratic governor’s administration downplayed that fact, saying they never do check with the IRS while designing programs but that they think they crafted this one correctly.
“The IRS has indicated that it is in the process of reaching its own determination, and we believe that the agency should conclude too that the payments are exempt,” Sharon Huntley, a spokesperson for the governor’s budget office, said Friday. “We encourage them to reach this conclusion swiftly so that Maine people, and others across the nation, may have certainty.”
Some agree, some don’t: States with relief programs may be treated differently by the IRS, which issued a statement last week calling the rules around the programs “complex.” Many tax experts think a strict reading of federal law would apply taxes to these payments, but popular tax software companies like TurboTax have concluded that they will not be taxed and have submitted returns as such.
The effect: It is unclear when the IRS guidelines will come down. However, the situation most threatens lower-income Mainers who have already filed their taxes and risk a major delay on their return if the relief payments end up being taxed.
This may end with the Biden administration or congressional delegation getting involved, but there are major complications in play for states with relief programs. If these relief payments are taxed, Maine’s round of $450 heating aid checks going out now almost certainly will be as well, threatening to dampen the relief effects.