California's Middle Class Tax Refund is a federal income?

Technical topics regarding tax preparation.
#1
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The California Franchise Tax Board says:

Taxable income
The MCTR payment is not taxable for California state income tax purposes. You do not need to claim the payment as income on your California income tax return. You should seek guidance from the IRS regarding federal taxability.

1099-MISC
The MCTR payments may be considered federal income. As such, 1099-MISC for MCTR payments of $600 or more will be issued. You should consult the IRS or your tax professional regarding the federal tax treatment of these payments.


Can we reach a consensus that it is a federal taxable income or not?

PS: It is interesting that California does not get this clarified on behalf of the all the California taxpayers (or most of them) that they have to get clarification individually.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#2
JAD  
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Spidell, a CA tax research service, just issued a blast saying that it is taxable for fed, but they did not explain their reasoning.
 

#3
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Depends if you can justify your client falling under the General Welfare Benefit rule
Last edited by TAXMASTER on 18-Dec-2022 7:57pm, edited 1 time in total.
 

#4
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Why wouldn’t CA issue a 1099-G instead of a 1099-Misc?
 

#5
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It seems to meet all of the requirements of the general welfare exclusion, which are that the payments must (1) be made from a governmental fund, (2) be for the promotion of general welfare (i.e., generally based on individual or family needs such as housing, education, and basic sustenance expenses), and (3) not represent compensation for services. See Rev. Proc. 2014-35.

https://www.irs.gov/pub/irs-drop/rp-14-35.pdf
 

#6
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It seems to meet all of the requirements of the general welfare exclusion,


Rev. Proc. 2014-35 To qualify under the general welfare exclusion, the payments must (1) be made pursuant to a governmental program, (2) be for the promotion of the general welfare (that is, based on need), and (3) not represent compensation for services.

Its called the Middle Class Tax Refund. Is my $600K AGI client middle class and therefore meets the need based general welfare requirements?
 

#7
Nilodop  
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The refund is not that large, and it quits at $500k AGI (CA).
How about it's subject to federal income tax, but eligible for application of tax benefit rule (sec 111)?
 

#8
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TAXMASTER wrote:Its called the Middle Class Tax Refund.

Actually, it's called the "Better For Families Tax Refund." I don’t know where the term “Middle Class Tax Refund” came from.

Nilodop wrote:How about it's subject to federal income tax, but eligible for application of tax benefit rule (sec 111)?

It's not a tax refund, so sec. 111 wouldn't apply. You didn’t have to pay any tax to qualify, although you did have to file a 2020 tax return to qualify.

This is California AB 192. According to the legislative analysis, the payments were ---

to low-income and middle-income Californians in order to provide financial relief for economic disruptions resulting from the COVID-19 emergency, such as the financial burdens of inflation and increasing costs for gas, groceries, and other necessities.

https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB192

From this language, it sounds to me like it's based on need.
 

#9
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NoCalCPA85 wrote:From this language, it sounds to me like it's based on need.


This podcast https://www.caltax.com/news/podcast/pod ... x-refunds/ says (at 1:40) it is includible in federal income without providing a reason. Also the California will issue a form 1099-misc.

It looks like there is no consensus by reading this article, https://www.sfchronicle.com/california/ ... 625427.php , but people are leaning on this is a welfare payment not subject to tax. Since 1099-misc will be issued, we have to handle in the return one way or the other. I hope more clarification will come.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#10
EZTAX  
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And I was looking forward to a tax season without the need to reconcille stimulus payments!

Please make it stop!
 

#11
Nilodop  
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It's not a tax refund, so sec. 111 wouldn't apply. You didn’t have to pay any tax to qualify, although you did have to file a 2020 tax return to qualify.

Whether Better for Fanilies or Middle Class, they call it a tax refund, so I excuse my "mistake".

But wait! There are rev ruls (I think) saying that Sec 111 applies where, say, a taxpayer used the standard deduction in year one, paid no federal income tax that year, but got a state tax refund in year 2. So for the CA taxpayers who filed and paid CA tax, or who filed and paid no CA tax but used the standard deduction, would they not get to use 111's exclusion for the new tax "refund". Lemme know what you think on that.
 

#12
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So for the CA taxpayers who filed and paid CA tax, or who filed and paid no CA tax but used the standard deduction, would they not get to use 111's exclusion for the new tax "refund". Lemme know what you think on that.


Its a rebate payment not an income tax refund.

From the Bill: Specifies that the Better for Families rebate payment shall not be a refund or overpayment of income taxes under Chapter 6 (commencing with Section19031) of Part 10.2 of Division 2 of the Revenue and Taxation Code of any liability imposed under Part 10 (commencing with Section 17001) of Division 2 of the Revenue and Taxation Code.
 

#13
Nilodop  
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Looks like 19031 is in Chapter 4, not 6, and is about deficiency assessments.
But chapter 6 contains sec 19301 and the chapter is all about overpayents and claims for refund.
Either way, I yield.
 

#14
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JAD wrote:Spidell, a CA tax research service, just issued a blast saying that it is taxable for fed, but they did not explain their reasoning.


Actually, they did. The "refund" isn't linked to taxes paid so it isn't a refund. It's a stimulus payment so it is taxable.
 

#15
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Beagle wrote:It's a stimulus payment so it is taxable.

No, it's not taxable.

We are trying to determine a viable tax return position here. To do so, we can’t rely on Spidell, which is a private company offering only an opinion. We must rely on the law.

The law (AB 192) says that the payment isn’t a tax refund. See #12 above. Also, see sec. 8161(d) of the CA Welfare and Institutions Code, which the law added:

(d) The payment authorized by this section shall not be a refund of an overpayment of income taxes …

The law also says that for CA purposes, the payment is specifically excluded from gross income. See sec. 17131.12(a) of the CA Revenue & Taxation Code, which the law also added:

(a) Gross income does not include any payments received by an individual pursuant to Section 8161 of the Welfare and Institutions Code.

The law also says that the purpose of the payment is to provide financial relief for Californians who may have been adversely impacted by the increase in the cost of gas, goods, by supply chain disruptions the COVID-19 pandemic and other economic pressures. See sec. 10 of AB 192:

SEC. 10. Increased costs for goods, including gas, due to inflation, supply chain disruptions, the effects of the COVID-19 emergency, and other economic pressures have had a significant negative impact on the financial health of many Californians. The Legislature hereby finds and declares that the payments authorized by Chapter 4.9 (commencing with Section 8160) of Division 8 of the Welfare and Institutions Code, as added by this act, serve the public purpose of providing financial relief for Californians who may have been adversely impacted by these economic disruptions and do not constitute gifts of public funds within the meaning of Section 6 of Article XVI of the California Constitution.

In Notice 2002-76, the IRS says that such payments are excluded from gross income under the general welfare exclusion:

Governmental payments to help individuals and families meet disaster-related expenses are based on need. For example, Rev. Rul. 76-144, 1976-1 C.B. 17, holds that grants made under the Disaster Relief Act of 1974 to help individuals or families affected by a disaster meet extraordinary disaster-related necessary expenses or serious needs in the categories of medical, dental, housing, personal property, transportation, or funeral expenses (and not in the categories of nonessential, decorative, or luxury items) are excluded from gross income under the general welfare exclusion. In this context, because “need” is not defined in terms of financial need, the general welfare exclusion applies equally to all residents of an affected area regardless of their income levels. In the absence of a disaster, however, governmental payments made without regard to financial status, health, educational background, or employment status are not based on need and, thus, do not qualify under the general welfare exclusion. See Rev. Rul. 76-131, 1976-1 C.B. 16; and Rev. Rul. 85-39, 1985-1 C.B. 21.

https://www.irs.gov/pub/irs-drop/n-02-76.pdf

Given all of this, IMO, the only possible way you could conclude that the payments are taxable is to ignore the law.
 

#16
JAD  
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Great analysis, and I especially like your starting point where you said that Spidell is not substantial authority. I think way too many tax preparers treat anything that they write as authoritative, and it most certainly is not.

So what is your plan for dealing with this? The IRS will be receiving 1099s. Are you going to show the income and then back it out on another line with a statement?
 

#17
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JAD wrote:So what is your plan for dealing with this? The IRS will be receiving 1099s. Are you going to show the income and then back it out on another line with a statement?

Exactly. Show it as income on the 1040 Sch. 1, line 8z, then back it out on line 24z using the explanation "CA payment - general welfare exclusion."
 

#18
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Why does California think it’s income? Why is California issuing a 1099?
 

#19
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I have no clients west of the Appalachians so this doesn’t concern me, but I have to ask. What is the disaster that caused the payments to be made?
 

#20
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If you go far enough east of the Appalachians you end up in California. Shower thoughts...
 

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