Americans to get thousands more in tax refunds this year — residents of these states are eligible

A new court ruling could provide several Americans in three states with thousands more in tax refunds. Earlier this month, the U.S. Court of Appeals for the Fifth Circuit ruled that the Soroban Tax Court’s decision in a case regarding self-employment tax will be reversed, which provides clarity for taxpayers on how much they owe the federal government. As the tax filing season is underway, after the ruling, thousands of residents in three states, Texas, Louisiana, and Mississippi, could file amended returns and get money back if they have already paid self-employment taxes, as per Newsweek.

The circuit court ruled that the decision by the Tax Court in Soroban in the Sirius Solutions, L.L.L.P. v. Commissioner would be reversed, redefining the notions for a "limited partner" in a business. It rejected the functional analysis of the Tax Court, which permitted only passive investors, regardless of their status under state law, to qualify for exemption from self-employment tax. Now, as per the new ruling, a "limited partner" means “a partner in a limited partnership that has limited liability," in which the limited liability will be defined under the state law and not by the partner's level of participation/activity in the partnership. The Fifth Circuit added that if a partner holds several roles in a partnership, the exception will be applicable only to the income earned in the partner’s capacity as a limited partner.

The previous analysis from the Soroban left taxpayers guessing whether the state-law limited partner would be subject to self-employment tax. This decision clarifies the rule for taxpayers. “The court basically told the IRS, ‘No, you can't just look at how active someone is in the business and decide whether they owe self-employment tax. If someone's a true limited partner under state law (meaning they actually have limited liability), their share of partnership income doesn't get hit with SE tax. Period,” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek. He explained that the court has drawn a clear line on who is a limited partner and that they will be exempt.

Following the ruling, those who have been paying self-employment tax on their partnership income under the previous IRS rules in Texas, Mississippi, or Louisiana can file an amended return to get their refunds. “We're talking potentially thousands a year for someone pulling good income from a partnership or fund structure,” Ryan told the publication. He added that the refund would be substantial for fund managers, consulting partners, law firms, and PE folks, who often structure themselves as partners. "They've basically been overpaying, and now they've got a window to fix it," he noted.

Taxpayers can estimate their tax refund online through tools such as the IRS Tax Withholding Estimator. The deadline to file an amended tax return depends on the date of initial filing, as per Newsweek. Generally, taxpayers must file Form 1040-X within three years from the date of original filing; thus, those who filed their returns in April 2022 must file the amended return by April of this year. 

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