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Kathleen Pender
Although the Internal Revenue Service still has not issued any guidance on whether the California “middle-class tax refund” is taxable on federal returns, some major tax-preparation companies are treating it as not taxable.
But other tax professionals believe it is, prolonging the confusion as tax season begins in earnest.
“Based on currently available information, and our own expertise, our understanding is that these payments are not taxable at the federal or California state level,” Lisa Greene-Lewis, a spokeswoman for TurboTax, said via email. “We are providing guidance to our customers and are hopeful for additional clarification in the near future.” TurboTax is the nation’s best-selling tax preparation software.
TurboTax software is prompting users to report the payment as a California Middle Class Tax Refund, but it then deducts the payment so the net amount is zero.
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The Franchise Tax Board began sending these one-time payments, which range from $200 to $1,050, to state residents in late October. To qualify, people had to have filed a 2020 state tax return with no more than $250,000 in income for singles or $500,000 for married couples. The payments, designed to offset inflation, arrived via direct deposit or prepaid Visa debit card.
The bill that authorized the payments exempted them from state income tax. Although the bill called them refunds, it also said they “shall not be a refund of an overpayment of income taxes.”
“The problem here is the language that says it’s not a tax refund,” said Annette Nellen, a San José State University professor and director of its graduate tax program.
State income tax refunds are generally reported to the recipient and to the IRS on Form 1099-G, for government payments. The tax treatment is pretty clear: Taxpayers do not have to report the refund as income on their federal tax return if they didn’t itemize deductions on their return for the year that generated the refund, the IRS says.
If they did itemize deductions that year, and got a benefit from the state-tax deduction, then they would have to include some or all of the refund on their tax return for the year it was received. (Most people do not itemize deductions.)
The Franchise Tax Board surprised tax pros in November when it said it would send a different form - 1099-MISC for miscellaneous income - to anyone who received a payment of $600 or more because it “may be taxable income for federal purposes.” The board isn’t providing much help - instead of saying outright whether the payment is taxable, it instructs people to consult their tax professional or IRS Publication 525. But that publication doesn’t say what to do about a state tax refund that’s not a refund.
The IRS does say that in most cases, income from any source “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.” Income that is taxable is supposed to be reported whether you receive a 1099 form or not.
Tax professionals have been debating whether the payment would qualify for any federal tax exemption. One possible exemption is the “general welfare exclusion.”
The IRS describes it like this: “Payments made under social benefit programs for promotion of general welfare are excludable from gross income under a concept known as the general welfare doctrine. This applies only to governmental payments out of a welfare fund based upon the recipient's need, and not as compensation for services.”
Some tax pros have questioned whether payments made to joint filers making up to $500,000 would qualify for the exclusion based on need, especially when some lower-income people - mainly seniors with no income other than Social Security or disability - did not get payments because they didn't need to file a tax return.
“I interpret the payments as income that doesn't meet any exclusion under federal law,” Nellen said.
But absent any guidance from the IRS (which began accepting and processing 2022 returns on Jan. 23), some are figuring they do qualify for the general welfare exclusion.
Tom Cluster, who lives in Placer County, said that when he used TurboTax software to do his 2022 taxes, he entered his payment into the 1099-MISC section. On a page for “uncommon tax situations” he checked a circle that said, “This was a California Middle Class Tax Refund (MCTR).” At the bottom of that page the following appeared: “The California Middle Class Tax Refund (MCTR) will not be taxable on your California or Federal returns.”
So how did this show up on his federal return? It appeared on Schedule 1, line 8z. Under the words “other income” it said “CA Payment 700.” Immediately under that line it said “CA payment - general welfare exclusion (minus) 700. The amount entered in the box on line 8z was zero.
“I think that’s a very reasonable approach,” said John Sensiba, managing partner of Bay Area accounting firm Sensiba San Filippo. He doesn’t think people would even need to give a reason for subtracting the refund.
“I don’t believe it’s taxable because it’s not compensation for services, it doesn’t fit any of the income categories,” Sensiba said. “I think the best argument the federal government could make for it being taxable is that it is a tax refund, despite what California says.”
In that case, the refund would only be taxable if the person benefited from a state income tax deduction in the previous year. Sensiba said most people in the Bay Area don't benefit, or benefit fully, from a state tax deduction because they don't itemize deductions on their federal return, or they do itemize but their state and local taxes combined (including income and property tax) exceed the $10,000 limit.
H&R Block is the second-largest seller of tax-prep software and prepares taxes for clients at storefront locations.
“Without clear IRS guidance currently, there is a reasonable basis to claim the payments are not taxable at the federal level,” Andy Phillips, director at The Tax Institute at H&R Block, said via email. “Our guidance is to report the income on the federal return (Schedule 1), and clearly indicate the payment is for the California Middle Class Tax Refund. Clearly reporting the payment should help make it clear to the IRS how the taxpayer is treating the payment and prevent possible IRS notices.”
Phillips declined to say how, if the payment is not federally taxable, it should be reported on the return. “We have a process for our own clients, but would not want to be responsible for providing that same guidance to others if the IRS were to take a different position,” he wrote.
The IRS did not respond to a question asking how its Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs, which offer free basic tax return preparation to low-income and other eligible clients, are treating the California payments.
California Sens. Dianne Feinstein Alex Padilla both reached out to the IRS for clarification, their offices told The Chronicle.
At least 10 other states issued one-time payments to eligible residents last year to offset inflation or return part of their budget surpluses, according to the Tax Foundation.
But most did it in a more straightforward way.
Georgia, Virginia and South Carolina, for example, issued direct deposits or paper checks - not debit cards - to residents who had a state income tax liability in 2020 or 2021, depending on the state. (California did not require a 2020 tax liability to get a refund.)
“Most of the other state payments represent a state income tax refund,” H&R Block’s Phillips said. “If the taxpayer took the standard deduction and did not deduct state taxes on their prior federal tax return, they do not need to pay federal tax on their tax refund. However, if the taxpayer itemized and deducted state taxes, a portion of the payment may be taxable.”
Another complication: Some Californians might receive a Form 1099-MISC for a payment they never received or for a payment they got on a debit card that was depleted by online thieves after they activated it.
In the first case, “Individuals who received a 1099-MISC for MCTR, but did not receive a MCTR payment, should dial 800-852-5711 and press 1,” the Franchise Tax Voard said in an email.
And what about people who received a card but discovered the funds had been stolen by online thieves?
That happened to Elena Njemanze, a kindergarten teacher who lives in Emeryville. When she tried to use the debit card to buy baby formula at the Berkeley Bowl on Dec. 19, it was rejected for insufficient funds. She later discovered someone had used the $480 remaining on her $700 card to make purchases at Kay Jewelers and GameStop in Victorville (San Bernardino County) at 2 a.m.
She reported it to Money Network, the company hired to issue the debit cards, and after waiting on hold for 40 minutes, was told it would take 45 to 90 days to investigate. Now she’s wondering what to do about the 1099-MISC for the $700 she received.
The Franchise Tax Board said it and Money Network will work to reissue a stolen payment if the recipient promptly reports it.
Asked what they should do about taxes, the Franchise Tax Board would offer only this complicated explanation by email: “With respect to federal taxability, a taxpayer is ‘generally taxed on income that is available to [them], regardless of whether it is actually in [their] possession,’” it said, quoting IRS publication 525. “Therefore, if your MCTR payment was not received by you in 2022, it may not be considered taxable income for the 2022 tax year. If the recipient receives the reissued MCTR payment in 2023, the MCTR payment may be considered taxable income for the tax year 2023 because the payment was available to the recipient in 2023.”
It said it would not issue a corrected 1099-MISC for 2022 to theft victims.
Due to the “complexity,” it recommended they consult the IRS publication or their tax professional.
Let’s hope they can find the answer.
Kathleen Pender is a freelance writer and former columnist for The San Francisco Chronicle. Email: kathpender84@gmail.com Twitter: @KathPender
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FAQs
Is the California inflation Relief payment taxable? ›
That means you don't need to claim your inflation relief payment — no matter the size — on your California income tax return. However, the MCTR “may be considered federal income,” according to the FTB.
Why does TurboTax say I owe state tax? ›The state tax due means that you owe taxes to the state because you didn't withhold enough. The taxes that were withheld from your wages or paid in by you were not enough to fulfill the entire tax liability for the tax year that you owe to the state. You are now required to send the state an additional payment.
Does federal tax due on TurboTax mean I owe? ›Federal tax due near the top of your screen means you owe that amount to the IRS. If you're still working on your return, those numbers will likely change as you enter more items. Your tax due amount may even be replaced by a tax refund by the time you finish doing your taxes.
Is California stimulus check taxable on federal return? ›No, the state stimulus payments would be looked at similar to welfare benefits, they are not taxable on your federal return.
Why i haven t received my California inflation Relief check? ›I haven't received my inflation relief payment
“Most payments will fall into our online schedule,” LePage said “but we have long explained that for a variety of reasons some tax returns require additional review and this can result in a payment being issued beyond the stated time frames.”
If you believe you should have received your payment already but haven't, the FTB suggests contacting customer service at 1-800-542-9332. A customer service agent will help you confirm you qualify, explain what payment you'll receive and when.
Why is my state refund lower than TurboTax said? ›If your refund was less than you expected, it may have been reduced by the IRS or a Financial Management Service (FMS) to pay past-due child support, federal agency nontax debts, state income tax obligations, or unemployment compensation debts owed to a state.
What does CA tax due mean on TurboTax? ›CA Tax due is the amount you need to pay. The amount will continue to change until you enter all your forms and information and complete the final review.
Why is my state refund less than what TurboTax said? ›If your refund amount is different than you expected, it may be because we made changes to your tax return including corrections to any Recovery Rebate Credit or Child Tax Credit amounts. Also, all or part of your refund may have been used (offset) to pay off past-due tax or debts.
What does federal owe mean on H & R Block? ›More from H&R Block
Any time you don't pay the tax balance shown on your federal income tax return in full by the due date, you create a tax debt. The IRS can charge penalties and interest on that debt, and those will add up until you pay off the tax debt.
Why do I suddenly owe federal taxes? ›
There are many reasons why you could owe money on your taxes. Some common causes can include withholding too little from your paycheck, failure to file, changes in the tax code, higher income than usual or changes in deductions.
Why do i owe federal taxes this year 2022? ›At a Glance: All working US citizens must pay taxes on their income. If at the end of the year you find that you still owe taxes, it is because you underpayed the taxes for your tax bracket. This may have resulted from a job change, a filing change, neglegence, or other reason.
Do I need to report my stimulus payment on my taxes? ›Do You Need to Report Your Stimulus Payment? Because your COVID stimulus check was non-taxable income, you do not need to report it on your 2020 tax return. The amount you received was not an advance on your tax refund, and will not reduce any refund you get in 2021 or increase any amount you may owe.
Is my stimulus included in my federal tax return? ›You can claim the stimulus payments as a tax credit and get the money as part of your tax refund. The stimulus checks are a federal tax credit, known as the Recovery Rebate Credit. In order to get the Recovery Rebate Credit, you will need to file a tax return.
How to get California inflation relief checks? ›Who is eligible for inflation relief payments? Recipients must have filed their 2020 tax return by Oct. 15, 2021, have met certain income limits (see below), were not claimed as a dependent in the 2020 tax year, and were California residents for six months or more of the 2020 tax year.
How much is California relief check? ›Under the tax rebate plan, Californians earning up to $75,000 for individuals or $150,000 for joint filers would receive $350 per taxpayer, plus an additional $350 if they have at least one dependent. A single parent would therefore receive $700 and two-parent families would receive $1,050.
How do I get a California relief check? ›California will provide the Golden State Stimulus payment to families and individuals who qualify. You may receive this payment if you file your 2020 tax return and receive the California Earned Income Tax Credit (CalEITC) or file with an Individual Taxpayer Identification Number (ITIN).
Who gets the middle class refund? ›Who qualifies for a Middle Class Tax Refund? California taxpayers who filed individually and made $250,000 or less were eligible, as were couples who filed jointly and made $500,000 or less. According to the Franchise Tax Board, that works out to about 25 million Californians.
When can we expect California inflation check? ›Payments are expected to be issued between October 2022 and January 2023.
Are we getting a stimulus check in October 2022? ›Rebates have been issued for people who filed a return by October 17, 2022. For those who file after October 17 but before February 15, 2023, a rebate check will be issued by March 31, 2023.
Are Californians getting a stimulus check 2022? ›
Californians who received money from either round of Golden State Stimulus payments were the first to receive direct deposits, which should have arrived before Oct. 25, 2022. The remainder of direct deposits were reportedly issued between Oct. 28 and Nov. 14, 2022.
Why is my California refund lower than expected? ›Sometimes, you'll receive a refund that's either more or less than you expected. Common reasons include changes to a tax return or a payment of past due federal or state debts.
Is TurboTax federal refund accurate? ›TURBOTAX ONLINE GUARANTEES
100% Accurate Calculations Guarantee: If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest.
Why is my refund different than the amount on the tax return I filed? All or part of your refund may have been used (offset) to pay off past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or other federal nontax debts, such as student loans.
How do I claim my California stimulus TurboTax? ›Eligibility is based on your 2020 tax return (the one you file in 2021). You will need to file your 2020 California state tax return by October 15, 2021 in order to receive your California stimulus check.
What is California Adjustment TurboTax? ›The adjustment schedule is used to adjust the Federal AGI and some Federal deductions on the California return according to California law.
How do I know if Im getting a TurboTax refund? ›- If you. e-filed. with TurboTax. Sign in to check your federal return. ...
- Track your federal. tax refund. Once your return's accepted, you can track your refund. If you don't receive it within 21 days, contact the IRS. ...
- Track my. state refund. We'll help you find your. state's instructions.
Your refund may be different if you used the Refund Processing Service to pay your TurboTax Online fees. TurboTax fees plus the additional processing fee is deducted from your Federal Tax refund. It could be due to a refund offset.
Why is my federal and state refund so low? ›Typically, you get a federal refund when you've overpaid yearly taxes or withheld more than the amount you owe. You may receive a lower refund because there was no stimulus payment in 2022, and there's a less generous tax deduction for charitable gifts, the IRS said.
Why is my federal refund so low 2022? ›Typically, you can expect a federal refund if you've overpaid yearly taxes or have withheld more than what you owe. Your 2022 refund may be smaller because there were less generous tax breaks after pandemic relief expired, experts say.
How do I know what federal taxes I owe? ›
You can access your federal tax account through a secure login at IRS.gov/account. Once in your account, you can view the amount you owe along with details of your balance, view 18 months of payment history, access Get Transcript, and view key information from your current year tax return.
How do you end up owing federal taxes? ›- Too little withheld from their pay. You can give yourself a raise just by changing your Form W-4 with your employer. ...
- Extra income not subject to withholding. ...
- Self-employment tax. ...
- Difficulty making quarterly estimated taxes. ...
- Changes in your tax return.
Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time. Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
Does owing the IRS ever go away? ›Generally, under IRC § 6502, the IRS will have 10 years to collect a liability from the date of assessment. After this 10-year period or statute of limitations has expired, the IRS can no longer try and collect on an IRS balance due.
Why do I owe taxes if I claim 0 and single? ›If you claimed 0 and still owe taxes, chances are you added “married” to your W4 form. When you claim 0 in allowances, it seems as if you are the only one who earns and that your spouse does not. Then, when both of you earn, and the amount reaches the 25% tax bracket, the amount of tax sent is not enough.
What happens if you owe the IRS more than $25000? ›Generally, when you owe more than $50,000, the IRS requires you to submit Form 433-F (Collection Information Statement) when you apply for a payment plan. This form requires detailed information about your finances, and it helps the IRS ensure that you are making the largest payment possible on your tax bill.
Do I have to pay federal taxes 2022? ›By law, everyone must pay tax as they earn income. Generally taxpayers must pay at least 90 percent of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two. If they don't, they may owe an estimated tax penalty when they file.
Does stimulus check affect tax refund 2022? ›Taxpayers will not receive an additional stimulus payment with a 2023 tax refund because there were no Economic Impact Payments for 2022. In addition, taxpayers who don't itemize and take the standard deduction, won't be able to deduct their charitable contributions."
Do I have to report the third stimulus check on my taxes? ›None of the three stimulus checks (or Recovery Rebate Credits) are considered income, and therefore aren't taxable. They won't reduce your refund or increase what you owe when you file your taxes this year, or next. They also won't affect your eligibility for any federal government assistance or benefits.
Where do I enter my economic impact payment in TurboTax? ›Go to Screen 38.2 Recovery Rebate, CTC, EIC, Other Credits. Locate the Recovery Rebate Credit section at the top of this screen. Enter the amount of Economic impact payment 3 received, or enter -1 to indicate zero.
Are we getting a stimulus check in July 2022? ›
State leaders say an estimated 23 million people qualify for the checks, which will be sent out between October 2022 and January 2023. The payment is only available to residents who have lived in California for at least 6 months in the 2020 tax year or who are living in the state by the time the check is issued.
Will I get a 1099 for stimulus money? ›No. You do not get a 1099G for the Stimulus payment. 1099G usually comes from your state for unemployment or a state refund you got last year.
How do I know if I got a federal stimulus check? ›Eligible individuals can visit IRS.gov and use the Get My Payment tool to find out the status of their Economic Impact Payment. This tool will show if a payment has been issued and whether the payment was direct deposited or sent by mail.
Why have i not received my California inflation Relief check? ›If you believe you should have received your payment already but haven't, the FTB suggests contacting customer service at 1-800-542-9332. A customer service agent will help you confirm you qualify, explain what payment you'll receive and when.
Is California inflation relief taxable? ›“Based on currently available information, and our own expertise, our understanding is that these payments are not taxable at the federal or California state level,” Lisa Greene-Lewis, a spokeswoman for TurboTax, said via email.
How to check inflation relief check status? ›- California Franchise Tax Board: 800-542-9332.
- Sacramento Office: 916-227-6822.
- Oakland Office: 510-622-4693.
Franchise Tax Board:
As you mentioned, the MCTR payment is not taxable for California state income tax purposes. Taxpayers or their tax preparers can refer to IRS Publication 525 (2022), Taxable and Nontaxable Income, to determine when the MCTR payment could be subject to federal tax in their situation.
Stimulus payment and taxable income
The GSS I and GSS II are not taxable for California state income taxes. You will not claim this as income on your California income tax return.
As taxable income, these payments must be reported on your federal tax return, but they are exempt from California state income tax.
What is the California inflation Relief payment? ›The one-time payments range from $400 to $1,050 for couples who filed jointly on their 2020 state income tax return and $200 to $700 for people who filed independently. Eligible residents need to meet the state's adjusted gross income limits and have filed their 2020 tax return by Oct. 15, 2021.
Why haven t I received my gas rebate in California? ›
If you believe you should have received your payment already but haven't, the FTB suggests contacting customer service at 1-800-542-9332. A customer service agent will help you confirm you qualify, explain what payment you'll receive and when.
How do I check my California gas rebate? ›There isn't a tracking tool. The tax board does provide dates for when they expect to send out each round of payments, which give you a sense of when you'll receive a direct deposit or debit card. They expect 90% direct deposits to be issued in October 2022. Debit cards are slated to be sent out between Oct.
Will Social Security recipients get California inflation relief checks? ›An individual who relies exclusively on social security or disability as their income, and therefore had a CA AGI or $0 in 2020, will receive $350 if they do not claim a dependent, or $700 if they have at least one dependent, according to the Franchise Tax Bureau. Couples filing jointly will receive even more.
Do I need to show my stimulus check on taxes? ›The money from the stimulus checks is not considered income and thus taxpayers will not owe taxes on it.
Do Californians have to pay federal taxes on unemployment? ›Federal return
If you received unemployment, you should receive Form 1099-G , showing the amount you were paid. Unemployment compensation is taxable for federal purposes.
You might have claimed to be exempt from withholding on your Form W-4. You must meet certain requirements to be exempt from withholding and have no federal income tax withheld from your paychecks. You should check with your HR department to make sure you have the correct amount withheld.
Does a 1099-G mean I owe money? ›Form 1099-G is issued by a government agency to inform you of funds you have received that you may need to report on your federal income tax return. Box 1 of the 1099-G Form shows your total unemployment compensation payments for the year, which generally need to be reported as taxable income on Form 1040.
When to expect California inflation relief checks? ›Payments are expected to be issued between October 2022 and January 2023.
Who gets inflation relief checks in California? ›Single people earning $75,000 or less are eligible for the full payment, as are joint-filers earning less than $150,000. Single filers earning up to $250,000 are eligible for some payment, while heads of households or joint filers earning up to $500,000 also will receive a partial payment.
Are we getting inflation checks? ›The final federal stimulus checks were mailed out in 2021. However, for more recent economic woes facing Americans – most notably, high inflation – there's been no such relief from Uncle Sam. Fortunately, though, some states stepped in and filled the void with their own stimulus check payments in 2022.