Gov. Jared Polis joined governors from eight other states in urging IRS Commissioner Daniel Werfel to provide guidance on the taxability of Family and Medical Leave Insurance, or FAMLI, benefits to avoid double taxation.

“As states operating these programs, we urge the Internal Revenue Service to provide clarifying guidance in this area, specifically regarding the taxability of these benefits and premiums, and to prevent the risk of double taxation,” said a Jan. 18 letter signed by the state leaders. “The current absence of guidance from the IRS on the tax treatment of these programs creates a substantial risk of an unexpected and large tax liability for those who rely on these programs to take family leave, deal with a personal illness, or take care of vulnerable family members.” 

The letter stressed that “these programs generally operate as social insurance programs, not allowing a deduction for premiums and taxing benefits effectively represents double taxation.”

“While taxation of wage replacement is consistent with IRS’ treatment of other programs, in its clarifying guidance, the IRS should ensure that program participants are not taxed on both mandatory premiums paid and benefits received,” the letter continued. “In general taxation on benefits received makes more sense than taxation on monthly premiums, which should not be considered taxable income.”

Colorado’s FAMLI program, approved by voters in 2020, ensures workers have access to paid leave when they need to take extended time off due to a personal or family emergency. Currently, these benefits are not taxed by the state but are taxed by the IRS similarly to unemployment. The benefits offer employees up to 12 weeks of paid leave.

Along with Polis, the letter was signed by governors from Connecticut, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon and Washington. 

The letter questioned the IRS’ outdated guidance, noting the most recent is from 2005, which predates the start of Colorado’s FAMLI program.

“As more states continue to adopt similar programs, the IRS should issue clarifying and current guidance on how both employers and employees should treat these premiums and benefits, including whether taxability hinges on the taxpayer itemizing deductions and claiming the (state and local tax) deduction, and what to do if the amount of the benefit exceeded the amount of the premiums paid,” the letter said. 

Recently, Colorado persuaded the IRS to not tax the dollars residents get from Taxpayer’s Bill of Rights refunds – at least not this year. In recent years, the federal agency has pushed to tax the TABOR refunds that residents get. The state has argued it is simply returning already taxed money. 

Earlier this month, U.S. Sen. Michael Bennett confirmed that the IRS will not treat the refunds as taxable income this year. However, that does not mean the issue is a done deal. 

Dating back to last summer, members of the state’s congressional delegation and Polis have called on the IRS to “resolve the current ambiguity” that resulted from proposed agency rules that left the status of TABOR refunds unclear for the 2023 tax year.