(The Center Square) – Colorado’s Congressional leaders from both parties united in a request for the Internal Revenue Service to not rule Taxpayer’s Bill of Rights refunds as taxable income.
“While we appreciate you and your agency’s continued communication with our offices, we request that this be resolved in a timely manner to avoid further confusion for taxpayers in our state,” according to the letter sent to Danny Werfel, commissioner of the IRS.
A smaller group of bipartisan Colorado’s Congressional leaders made the same request to the IRS last year, emphasizing 30 years of precedent in the state.
“For the IRS to interfere in the distribution of TABOR refunds would be a gross federal overreach into state governance and into the wallets of Coloradans who depend upon the refund every year,” Republican Greg Lopez, who won a special election in June to replace Republican Ken Buck in the 4th District after he resigned, posted on X, the platform formerly known as Twitter.
The flat $800 and $1,600 TABOR refunds issued by Colorado for fiscal year 2022-2023 is under consideration to be treated as federal taxable income by the IRS.
“Moreover, we are particularly concerned that if such guidance were to apply to the tax year in question, Colorado Department of Revenue officials may be unable to successfully and appropriately prepare for this change, and that taxpayers would thereby be left scrambling to determine whether they had unanticipated tax liabilities,” according to the letter.
TABOR refund payments were approved by Colorado voters in 1992 and the IRS never considered the payments as taxable since then. Colorado’s federal legislators stated changing the rules would take significant time and resources from the state to inform the public of the effects of the changes.
“It would also have a significant impact on taxpayers – especially low-income taxpayers – who may have new unanticipated tax obligations as a result of this policy interpretation,” the letter stated. “Moreover, the Colorado General Assembly has adjusted the refund mechanisms to comport with IRS guidance on taxability so that this question is fully resolved going forward.”
In 2022, many states implemented payment programs to residents through COVID-19 pandemic relief programs. The IRS provided guidance on the federal tax treatment of 2022 payments and changed the rule in 2023.
“Most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes,” according to a 2023 media release from the IRS. “As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds. … Taxpayers who itemize their deductions on their federal income tax returns and receive a state tax refund must include the refund in income only if they deducted the state tax paid. Because of the $10,000 limit on itemized deductions for state income and property taxes, some itemizers are not able to deduct all of the state taxes they paid and do not need to include a refund in income.”
