As a result of the recent controversy over the taxation of federal income tax rebates at the state level, three of the nine states that allow a deduction for federal taxes paid will change their laws to prevent taxation of this year's tax rebate. Iowa, Oregon, and Utah have approved exemptions for the tax rebates so that residents of these states will not be taxed on this money.
Missouri and Oklahoma are also reportedly looking into making similar changes.
In the states that allow deductions of federal income taxes paid, taxpayers report federal income tax refunds as income on their state tax returns. The current controversy is a result of the IRS stating that these states should not tax their residents on this summer's federal income tax rebates.
The other four states where residents experience a state tax effect based on federal income tax are Alabama, Louisiana, Montana, and North Dakota. None of these states has indicated any plans thusfar to exempt the federal income tax rebates from state income tax.