IRS Rejects Minnesota’s Bid to Exclude State Tax Rebates from Federal Taxes

The Internal Revenue Service (IRS) has declared that the state tax rebates totaling nearly $1 billion, distributed to over 2 million Minnesotans last autumn, will be subjected to federal income taxes, contrary to the appeals made by state authorities.

The potential federal tax liability on these rebates, received through checks and direct deposits, may range from $26 to $286 per individual, depending on their income and the amount received.

The state Department of Revenue has issued a form to all recipients, intended for use in their federal individual income tax filings for the current year. It is noteworthy that these payments are exempt from state taxes.

Since December, the IRS has consistently maintained the position that it considers these rebates as federally taxable income. 

This stance surprised state officials, leading to extensive efforts, including lobbying by Democratic Governor Tim Walz and members of the state’s congressional delegation, in an attempt to overturn this decision.

IRS Rejects Minnesota Reps Stauber and Craig

The final rejection was communicated to Minnesota Representatives Pete Stauber and Angie Craig through recent correspondence from the agency. 

In these letters,IRS Commissioner Daniel Werfel clarified that the rebates were not deemed as general welfare or disaster relief, categories that qualify for exclusion from federal taxes.

The rebates constituted a component of a comprehensive set of tax reductions endorsed during the 2023 legislative session, aiming to return a portion of a projected $17.6 billion budget surplus to taxpayers. 

Individuals with a gross adjusted income of up to $75,000 in 2021 were eligible for a $260 rebate, while married filers with earnings up to $150,000 could receive $520. 

Additionally, families could obtain an extra $260 rebate for each of up to three dependents, totaling a maximum of $1,300.