Stimulus Check Update: 2.1 Million People Owe IRS Money for Direct Payment

More than 2 million Minnesotans owe the IRS money for their standard tax rebate.

While the Minnesota Department of Revenue had approved $260 rebates under certain income and dependent qualifications, the federal government will be taking away a significant chunk of the payments.

The difference will be between $26 to $286 depending on a specific household's previous payout.

The cut comes as the Minnesota Department of Revenue couldn't get approval for the rebates to be tax-free.

In all, $200 million or more than $1 billion of the overall rebate pot will wind up in federal hands.

"It's certainly disappointing. But ultimately, the IRS has the final determination on federal taxability," Revenue Commissioner Paul Marquart told MPR News. "Of course, these are not taxable on the state level."

About 18 percent, or 390,000, of rebate recipients likely won't owe anything because they don't have a federal tax liability. But that leaves 2.1 million recipients.

Tax filers affected will likely end up paying somewhere between 10 percent to 22 percent of their rebate in federal taxes. That means those with a $260 payment would owe between $26 and $57. Plus, everyone filing in Minnesota will have to claim the income when filing federally for 2023 taxes.

In 2022, the IRS had a very different stance on rebates of this kind. But it also ruled that Minnesota's frontline worker awards in 2022 were taxable.

And during the summer of 2023, the IRS defined new draft guidelines that would separate checks issued in 2022 and those approved after that. Since the federal COVID-19 pandemic emergency declaration ended on May 11, 2023, the rebates wouldn't follow the tax exempt rules of that time period.

Still, state officials had hoped that the federal government would change its mind.

"We used the parameters and the facts that we kind of had before us to design this one-time rebate," Marquart said. "And we thought we had matched up very well with those states that had been found not taxable. But ultimately, it's the IRS who makes that determination."

Zack Hellman, an enrolled agent and the owner of Tax Prep Tech, said the IRS decision could fuel a larger shift in tax rules for state rebates.

"The IRS's decision represents a significant shift from its previous stance on similar rebates distributed by other states in 2022," Hellman told Newsweek. "This change aligns with the IRS's draft guidance issued earlier, which suggested a different approach to recently enacted rebates following the end of the federal pandemic emergency declaration in May 2023​​."

Taxpayers will now see 1099 tax forms reflecting the true rebate amount, he said.

"The situation in Minnesota might serve as a precedent, indicating that such changes in rebate taxation could become more common in other states, especially in the post-pandemic era where fiscal policies are continually adapting," Hellman said.