Free money isn't so free
An $1,800 windfall of tax-free money for a single filer from the federal government’s COVID relief program isn’t tax-free after all.
In Oregon, about half the state’s taxpayers who received stimulus checks, including many who earn under $50,000, could end up paying more state taxes this year because of the federal COVID relief checks.
According to the Oregon Department of Revenue, a single taxpayer who earned $25,000 in 2020 could end up owing an extra $114 April 15, the deadline for filing taxes.
Other taxpayers could see their refunds reduced because of the money, while still others who don’t have any federal tax liability won’t have to pay any state taxes. High income taxpayers who didn’t get stimulus checks wouldn’t be affected.
Most taxpayers received $1,200 last year from the federal government COVID program and another $600 this year, but the payments were both authorized in 2020, so they have to be accounted for on your 2020 returns. Families with children also received additional stimulus dollars.
Oregon legislators are aware of the issues and could potentially see a bill come forward this session to address this issue.
“I know people are thinking about this,” said Rep. Pam Marsh, D-Ashland. “We are chewing on this to see if there is an answer here.”
State Sen. Dick Anderson, R-Lincoln City, has vowed to introduce a bill that would prevent penalizing taxpayers because of the relief payments.
U.S. Rep. Peter DeFazio, D-Springfield, sent a letter to Gov. Kate Brown recently indicating Congress intended the stimulus money to be tax-free.
Technically, the Revenue Department doesn’t consider the COVID relief payments as income.
That’s because Oregon taxpayers can deduct a portion of their federal tax payments from their state income tax. The federal tax payments are considered a tax rebate rather than income.
Most years, the deduction results in a state tax break, but that tax break is reduced when stimulus checks are cut from the federal government.
The Revenue Department provided various possible scenarios as to the potential impact of the payments on Oregon taxpayers.
In the case of a single filer who earns $25,000, the tax subtraction on the state return without a stimulus would have been $1,318. Since the payments total $1,800, that wipes out the normal tax subtraction.
A person who is the head of a household with one child younger than 17 and earning $60,000 would owe an extra $235.
For a married couple filing jointly and earning $75,000, they would pay an extra $315.
For a married couple filing jointly with two children and earning $100,000, they would pay an extra $405.
Rich Hoover, a spokesman for the Revenue Department, said for the 2020 tax year, Oregon income tax filers who paid more than $6,950, or $3,475 for married filing separately, in federal taxes would not be affected on their state taxes.
He said that everyone’s tax situation is unique and how much they may owe or how much less they will receive as a refund will depend on a variety of factors.
“It’s difficult to paint this with a broad brush,” he said. “It’s going to affect mostly the middle income folks.”
Reach reporter Damian Mann at 541-776-4476 or firstname.lastname@example.org. Follow him on Twitter @reporterdm.