Maine officials accuse IRS of reversing pledge by taxing $450 state energy payments

State officials on Tuesday accused the Internal Revenue Service of reversing itself by denying a federal tax exemption for state payments intended to help 880,000 Mainers cope with high energy costs last winter.

The move could cost many taxpayers about $50 more when they file their federal returns in April, according to an accountant.

The IRS “verbally informed” Maine Revenue Services last week that the state’s $450 Winter Energy Relief payments issued from January through March will be taxed, state officials said Tuesday. The state, which will keep its tax-exempt status for the payments, said the IRS action represents a “stark reversal” from guidance published earlier this year.

Kirsten Figueroa, commissioner of the Department of Administrative and Financial Services, cited IRS guidance that state payments “made for the promotion of general welfare” will not be included as part of a taxpayer’s federal gross income. In a letter to William M. Paul, acting chief counsel of the IRS, she said the federal agency provided guidance for what she said are state payments to eligible residents under an “Energy Relief Payment Program.”

“This verbal guidance by the IRS is not supported by the written guidance published by the IRS and results in arbitrary and unnecessary confusion for the taxpayers of our state,” Figueroa said. “We are concerned that Maine taxpayers and practitioners may not get this update in a timely manner and that the IRS will hold taxpayers responsible for a decision the IRS is not even willing to put in writing or publicly announce.”

The IRS said the payments were not exempt disaster relief payments because they were enacted too late in the pandemic, despite the continuing federal disaster and public health emergency declarations, Figueroa said in her letter. She asked that the IRS reconsider its position.

The IRS did not respond to a request Tuesday to address Maine’s accusations. The agency said in its guidance that its direction applied only for payments made in 2022.

However, the administration of Gov. Janet Mills said in March that qualifying recipients were determined by filing their 2021 Maine tax return by Oct. 31, 2022; being a full-year resident for tax year 2021; and not claimed as a dependent on another taxpayer’s return for the tax year.

To qualify, taxpayers also had to have a reported federal adjusted income for the 2021 tax year of less than $200,000 for individuals filing a married joint return, $150,000 for an individual filing as a head of household or $100,000 for a single individual or a married individual filing a separate return.

A spokeswoman for the Department of Administrative and Financial Services said the IRS guidance cites a program making a payment in 2023 and that the state payment may be excluded from federal gross income for taxable year 2023.

Aaron E. Perkins, an accountant at Milliken, Perkins & Brunelle in Windham, said the federal tax on the relief payment would be $54 for nearly half of Maine taxpayers, or those who are in the 12% tax bracket, which includes couples with an annual income of up to $80,000, or $40,000 for an individual taxpayer.

‘IT’S ANNOYING’

“It’s not huge, but it’s annoying,” he said.

The checks were the centerpiece of a $473 million emergency winter energy relief plan that Mills and legislative leaders from both parties negotiated after the November 2022 election. The package, which was paid for with surplus tax revenue, was passed by the Legislature in January.

The high costs of home heating fuel and electricity were a top concern for voters and elected officials leading up to last year’s elections. The legislation was negotiated with Democratic and Republican leaders, although Senate Republicans initially blocked it and called for a public hearing.

After the hearing in January, three Republicans joined Senate Democrats to enact the bill. It required a two-thirds vote of the Legislature to take effect immediately, allowing checks to be sent last winter.

Maine isn’t alone in confusion over payments sent to residents.

Rebates sent this year by Minnesota also are being taxed by the federal government, according to that state’s Department of Revenue. The one-time rebate law provided payments of up to $1,300 for eligible taxpayers. The agency said it will mail forms to taxpayers who received the rebates for filing this year’s federal income tax returns in 2024.

In February, the IRS said state stimulus payments, such as the $850 pandemic relief checks Maine sent to tens of thousands of households, were not subject to federal taxes. Those payments were intended to help Mainers during a period of high inflation and lingering economic impacts of the COVID-19 pandemic and were considered by the IRS as general welfare or disaster relief payments.