IRS Statement
Here is the statement from the IRS on Taxability of State Payments
The IRS is aware of questions involving special tax refunds or payments made by states in 2022; we are working with state tax officials as quickly as possible to provide additional information and clarity for taxpayers. There are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week.
For taxpayers uncertain about the taxability of their state payments, the IRS recommends they wait until additional guidance is available or consult with a reputable tax professional. For taxpayers and tax preparers with questions, the best course of action is to wait for additional clarification on state payments rather than calling the IRS. We also do not recommend amending a previously filed 2022 return.
California sent out more than 16 million special Middle Class Tax Refund payments, worth $9 billion, to help counter inflation and high gas prices last year.
Advice Ignored
The Wall Street Journal notes that despite the IRS statement, H&R Block Inc. and Intuit Inc.’s TurboTax, two of the biggest tax-preparation companies, have continued to file returns for clients.
“Many taxpayers who file early in the season are very anxious for their refunds. Waiting another week to file would mean waiting another week for their refund,” said Kathy Pickering, chief tax officer at H&R Block.
The tax status of special state payments is just one reason many taxpayers might receive smaller tax refunds this year compared with last.
In some cases, it depends on whether a taxpayer itemizes deductions. The Virginia tax authorities said that the up-to-$500 one-time 2022 Virginia rebate will be treated like a state tax refund, so it will be taxable for taxpayers who itemize deductions, but not for taxpayers who take the standard deduction.
In California, state tax authorities have said that the payments aren’t taxable for state-income-tax purposes but may be for federal purposes. California issued more than 6.4 million 1099-MISC reporting forms to the taxpayers who got payments of $600 or more, according to the Franchise Tax Board, California’s tax authority.
H&R Block’s analysis concluded that the California payments aren’t taxable for federal purposes as certain payments to promote general welfare are excludable from federal income. So they are filing returns for customers who received the payments, but not including the payments as taxable income. TurboTax is also taking the position that the payments aren’t taxable for federal purposes, said Lisa Greene-Lewis, a certified public accountant and editor at TurboTax.
Middle Class Tax Refund
It seems pretty clear that California thought the payments were taxable at the Federal given that it sent out 1099-MISC forms.
And what does the name “Middle Class Tax Refund” itself imply?
The Middle Class Tax Refund has benefitted 31,650,087 California taxpayers and their dependents.
The majority of MCTR payments have been issued. Payments requiring additional review are still being processed. Data will no longer be updated weekly as the overall volume will not significantly increase. The next scheduled update will be on February 22, 2023.
Free Money Resolution
I expect Biden will heavily pressure the IRS to rule that the free money is not taxable. And if so, this will open the door for other free money handouts for all kinds of reasons.
Next time, the states will pick a better name to disguise the money. Something like CDRP, California Disaster Relief Program would be a better name to disguise what they are doing.
To pay for the disaster assistance, taxes will of course go up elsewhere.
Biden Sponsored Inflation
In case you missed it please see Biden Gives a Well-Delivered SOTU Speech Begging for More Inflation and Tax Hikes
I recap 25 inflation proposals from Biden’s State of the Union address.
This post originated at MishTalk.Com.
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