Millions of Californians are receiving payments in their bank account or mailbox from the state to help with soaring prices, but unlike stimulus payments sent out during the pandemic, these new
“middle-class tax refunds”
might be subject to federal income tax.
The Internal Revenue Service has not said whether the payments must be included on federal returns, but a recent decision by the California Franchise Tax Board to report payments of $600 or more to the IRS suggests they could be.
The payments, intended to defray inflation, are being sent to most residents who filed a 2020 tax return and range from $200 to $1,050 depending on income, filing status and the number of dependents reported on the return. Single people with income exceeding $250,000 a year and couples making more than $500,000 are not eligible.
The law that authorized them,
AB 192,
exempted them from state income tax.
“You do not need to claim the payment as income on your California income tax return,” the Franchise Tax Board says on its website. But they “may be considered federal income.”
For that reason, the tax board
disclosed last month
that it will issue IRS Form 1099-MISC for payments of $600 or more. This form is sent by the payer to the recipient – and the IRS – for certain types of miscellaneous, non-work-related income such as rent, prizes and awards.
The decision to issue 1099s surprised some tax professionals, because the state did not send those forms for the Golden State Stimulus payments it issued to
low- and middle-income residents
(up to $75,000 in annual income) in 2020 and 2021 for coronavirus relief.
The state did not issue a 1099 for those payments because it believed they qualified for a federal tax exemption under Section 139 of the Internal Revenue Code for disaster relief funds, Spidell Publishing, a provider of tax information for professionals, said in a note to clients and in
a podcast.
“We believe those Golden State Stimulus payments qualified for a federal gross income exclusion under either IRC Section 139 or the general welfare exemption under federal law,” Spidell said.
It’s not clear whether the new payments would qualify for either of those exemptions.
On its website, the state tax board advises recipients to “consult the IRS or your tax professional regarding the federal tax treatment of these payments.”
The IRS could not provide a clear answer. “I can tell you, we are aware of it. California is not the only state doing this,” IRS spokesman Raphael Tulino said.
The only answer Tulino provided was this except from IRS Publication 525. “In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but isn’t taxable.”
The federal stimulus payments that were sent to most Americans in 2020 and 2021 were not taxable at the federal or state level.
About 20 states
are issuing inflation-relief payments to residents, but many are structured as tax refunds. Although California is calling its payments “middle-class tax refunds,”
state law
specifically states that they “shall not be a refund of an overpayment of income taxes.”
State-tax refunds are reported on IRS Form 1099-G. But recipients don’t have to list those refunds as income on their federal return if they didn’t itemize deductions for the tax year that generated the refund,
the IRS says. If they did itemize deductions, some or all of the refund could be taxable.
Although the IRS has not issued guidance on California’s payments, “because the middle-class tax refund is not considered a return of taxes, it would not be taxable,” Lisa Greene-Lewis, a spokeswoman for TurboTax, which makes tax-preparation software, said via email. “It is a flat amount based on your 2020 income regardless of how much you paid in taxes and could fit into payments based on need or general welfare like stimulus payments, which would not be taxable.”
She added that TurboTax is reaching out to the IRS and Franchise Tax Board for answers and that “our products are updated regularly to reflect new and updated guidance.”
Spidell is not sure the California payments would qualify for a federal tax exemption.
AB 192 says they’re intended to “provide financial relief for Californians who may have been adversely impacted” by the “increased costs for goods, including gas, due to inflation, supply chain disruptions, the effects of the COVID-19 emergency, and other economic pressures.”
To qualify for the general welfare exemption, a payment must be made to an individual from a government fund; for the promotion of the general welfare, based on individual or family need; and not as payment for services, Spidell said in its note.
Whether payments made to taxpayers with incomes “up to $500,000 to assist them in meeting rising costs would qualify for the exclusion based on ‘need’ is an open question for which we’ll need guidance from the IRS,” attorney Sandy Weiner, Spidell’s California editor, said in the note. “In the interim, tax professionals will have to exercise their best judgment.”
Whether or not the IRS declares these payments subject to federal tax, those 1099 forms are sure to cause confusion. If they are deemed taxable, recipients who are required to file a federal return are supposed to include them as income for the year received whether or not they were reported on Form 1099. Whether most people would know how or remember to do so is another open question.
Kathleen Pender is a freelance writer and former columnist for The San Francisco Chronicle. Email:
[email protected]
Twitter:
@KathPender
— to news.google.com
