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

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.

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

Depends if you can justify your client falling under the General Welfare Benefit rule

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

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

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?

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)?

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.

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.

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.

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

Please make it stop!

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.

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.

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.

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.

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.

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?

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."

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

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?

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

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

Actually, the Franchise Tax Board doesn’t know for sure whether it's income. They're saying that it "may be." I think that they’re just being cautious by issuing the 1099. They say this:

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.

https://www.ftb.ca.gov/about-ftb/newsroom/middle-class-tax-refund/help.html

Spidell Publishing, a private company that offers tax advice, is the one saying it’s taxable for Federal purposes. But many of us think that they’re wrong and that they haven't considered the general welfare exclusion.

What is the disaster that caused the payments to be made?

While most of the rest of the country was paying $5.00 for a gallon of gasoline, Californians were paying $6.50 to $7.50. It was higher in certain parts of CA than others. This, along with the high cost of diesel, caused prices of everything that had to be trucked, from construction materials to groceries, to shoot up, and they’re still pretty high.

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

YEP. The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it. At this point the IRS isn't pointing to a rule and saying it applies and until they do, it's income.

The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it.

The "specific rule" here is the general welfare exclusion.

The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it.

The "specific rule" here is the general welfare exclusion.

So you are saying the IRS has ruled on this?

I don't think "income" is defined in Code or Regs., but maybe in cases, etc. Absent a definition, it's what the word commonly means. And if it's not "income", what else is it? Where would it go in a financual statement on GAAP?

But that does not necessarily mean it's taxable income. There are many exclusions from gross income, both statutory and otherwise, such as the general welfare one.

So you are saying the IRS has ruled on this?

Not specifically regarding the payment that we're discussing here, but in many other similar types of situations, the IRS has applied the general welfare exclusion, so the IRS has provided us with rules to follow to see if that exclusion applies. I cited two Rev. Procs. in my posts above.

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

YEP. The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it. At this point the IRS isn't pointing to a rule and saying it applies and until they do, it's income.

Not always true. This is a perfect example. CA will issue 1099s in case it is income. CA is punting the issue to each individual and his/her tax preparer to take a position. The fact that the state issues 1099s in case it is income does not mean that the issue is resolved.

the 1099-Misc is for reporting “income” - the payer has to make the call for issuing the 1099, not the payee

Whether it’s taxable to the payee (for whatever reason) is a separate discussion

I really don't understand why someone high up at the FTB cannot reach out to the IRS and get a definitive ruling on this. Think about how many countless hours of IRS staff and tax preparer energy would be saved if this was just resolved one way or another.

About 12% of the US population lives in Califronia. Think of how much more efficent it would be for everyone involved to get this resolved before tax season begins, Even better to stop the 1099's from being issued in the first place. How many thousands of phone calls would this prevent?

It's known as the "not my job" syndrome.

I really don't understand why someone high up at the FTB cannot reach out to the IRS and get a definitive ruling on this.

I think the FTB (Franchise Tax Board) probably did, it might be the IRS who refuse to provide a clear answer. After all, it is more work to issue 1099-MISC than get a clarification from the IRS. Do they (the FTB) have more access than us, and can get a written response?

I vaguely remember seeing a state stated in their website that they could not get an answer from the IRS when I looked up the federal taxability of a state income issue.

I didn't see a mention of when is it taxable income. I assume when it's received. CA has been late in issuing the payments and some were supposed to be mailed out by December 31. I assume clients will receive a 1099 but it may not be taxable until 2023.

Still trying to figure out how we are going to deal with this. Hoping for guidance.

Did a quick google search hoping for a miracle. Found this:

"Is middle class tax refund taxable by IRS?
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."

What logic!

I guess that settles it!

I included a couple of items about this in my organizer. I explained that the law is unclear, that professionals do not agree, that there is a general welfare exception that seems to apply that supports not taxing the $$, that we can take a position but if the IRS provides clarity later, they will receive an assessment. Then I ask what tax position they want to take. (a) Nontaxable with the chance that we later learn that this was wrong, and they will have to pay up, or (b) pay up now to avoid any future issues.

The amounts at issue are small. We have a reasonable basis. This is not worth a lot of time. Communicate in the most efficient way possible and let the client make the decision. IMO.

Spidell Publishing, a private company that offers tax advice, is the one saying it’s taxable for Federal purposes. But many of us think that they’re wrong and that they haven't considered the general welfare exclusion.

In the manual for their Federal & Calif. Tax Update, Spidell Publishing has changed their position. They are now saying that the general welfare exemption might apply. They say that it is "an open question for which we will need guidance from the IRS. In the interim, tax professionals will have to exercise their best judgement."

Just took their annual tax workshop and Renee Rodda (VP) said confidently that it was taxable.

I am still not convinced and am upset that this will consume time needlessly.

Our current plan (thanks for those that put this out above) is to tell clients that it is unknown at this time and they can play it either way. We will then have them sign a CYA saying we explained the situation to them and noting the choice they made and reminding them that they will be responsible for interest, penalties and taxes owed if they get a letter in the next few years.

Max taxable should not be much more than $200 so interest and penalties would be minimal.

We will put a copy of the signed letter in their copy so when they call to complain we will be able to remind them!

Just took their annual tax workshop and Renee Rodda (VP) said confidently that it was taxable.

Why would she say that when she's contradicted by Spidell's own written manual (page 8-2)?

My client just sent me a copy of the 1099-Misc. It's box 3 other income. The payer box reads CA FTB - MCTR.

I think that another argument could be made for exclusion. Sec. 139. It excludes from income a “qualified disaster relief payment.” 139(b)(1) says that this is an amount paid “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” 139(c)(2) says that a federally-declared disaster is a “qualified disaster.”

The CA law (AB 192) says that the purpose of the MCTR was to provide financial relief for the economic disruptions that resulted from the COVID-19 pandemic. COVID-19 was a federally declared disaster. See Notice 2020-18. https://www.irs.gov/pub/irs-drop/n-20-18.pdf

So, doesn’t this exclusion apply as well?

Spidell is just one opinion, nothing more. I subscribe, and I am grateful for the issues that they call to my attention. But it is not unusual at all for someone to make a statement that is not completely correct and omit the nuances that could cause a professional to come to a different conclusion. Or it seems like they want to conclude on something too quickly, and they get it completely wrong. I was once watching a webcast and they made a firm statement about limitations on the deduction of interest expense on real estate held for investment. I typed in a comment, pointing out flush language in 163 that said opposite of what they were saying. The reply was along the lines of "we are following the IRS's position as indicated in the form instructions." That's fine, but one source is more authoritative than the other, and they should alert the class that the instructions are not consistent with the IRC and there might be some thought that needs to be given to the issue. Just one example.

An instructor that I had at Golden Gate University said that they are good for sound bites. I think that is a little harsh, but even just the conversation here shows that the status of the MCTR as federal income is not settled.

Agree with posts# 15,17

A Sacramento news station KCRA interviewed the FTB. https://www.kcra.com/article/california ... s/42562278 When asked if the MCTR payments are taxable FTB replied" FTB: 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. However, as we note on our MCTR Help webpage, the MCTR payments may be considered federal income.

For that reason, FTB is issuing a 1099-MISC for MCTR payments of $600 or more. Individuals can refer to IRS Publication 525, Taxable and Nontaxable Income, or consult with a tax professional regarding the federal tax treatment of MCTR payments.

I looked in Pub 525 p30 under Disaster relief payments. "You can exclude from income any amount you receive that is a
qualified disaster relief payment. A qualified disaster relief payment is an amount paid to you:
1.
2.
3.
4. By a federal, state, or local government, or agency or instrumentality in connection with a qualified disaster in order to promote the general welfare.
For amounts paid under item 4, a disaster is qualified if it's determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.

Edit: October 13, 2022CA Senate AB 192 summary digest: This bill, a budget trailer bill, establishes the Better for Families Act, a framework to provide approximately $9.5 billion of payments 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.

IRS news room "the COVID-19 outbreak is a “qualified disaster” for purposes of section 139 the Code"

The U.S. Department of Health and Human Services (HHS) must renew the federal public health emergency (PHE) related to COVID-19 every 90 days to maintain certain health care flexibilities and waivers. The PHE has been in place since January 27, 2020, and renewed throughout the pandemic. The latest HHS extension for the PHE is effective through January 11, 2023.

David Fogel, a previous, greatly missed, contributor to this board and considered by many to be a gifted interpreter of IRS scripture has weighed in on this and agrees that a stong agrumenet can be made for it to be considered non-taxable income.

https://img1.wsimg.com/blobby/go/310b78 ... 4313102340

Nice article. I wonder why Dave did not conclude as to whether there is a more-likely-than-not, substantial-authority, or reasonable basis for his conclusion, which, btw, is simply

In my opinion, a good argument could be made that the payment under the Act is excludable from gross income based on the general welfare exclusion.

He does, however, acknowledge that

At any rate, the opinions of tax professionals (including mine) do not constitute substantial authority that may be relied upon for purposes of the accuracy- related penalty .18

.

whether there is a more-likely-than-not, substantial-authority, or reasonable basis for his conclusion

One could add Form 8275 disclosure if nervous about penalties. One could cite the lack of IRS guidance and then the 139 and general welfare arguments.

The FTB issued no 1099-Misc for the Golden State stimulus payments (AB/SB 88) as it beleived they qualified under IRC 139. If you read AB 88 it uses the same (as AB 192 MCTR) covid emergency as the reason for the payments.

Some are nervous because they think $500K AGI limit is not need under the general welfare exclusion. 139 does not have a need requirement and thus adds to the income exclusion argument.

One could add Form 8275 disclosure if nervous about penalties. One could cite the lack of IRS guidance and then the 139 and general welfare arguments.. Agree, one could. My point was simply that I wonder why Dave did not say his own view on what degree of authority is there.

David Fogel, a previous, greatly missed, contributor to this board and considered by many to be a gifted interpreter of IRS scripture has weighed in on this and agrees that a stong agrumenet can be made for it to be considered non-taxable income.

https://img1.wsimg.com/blobby/go/310b78 ... 4313102340

If you decide to go the route to back out the MCTR, what would be a good description of the backout entry? Would you just put "General Welfare Exclusion" or one that is more detailed?

What about all the people that received less than $600? It doesn’t seem right that we would tax our married couples or single parents but not all of the single individuals that received $250-$350. It either needs to be taxable to all and issue a 1099-G so that the $600 limit doesn’t apply or it should just be tax free like all of the other stimulus payments. We all know that as it stands now, our clients that received less than $600 are not going to include that income, so why should the $600 and up people do it also. Not including the 1099 will delay the processing and potential refunds, so just entering it in as other income and backing it out with a description and negative number is the only option. Many of us did the same for the 1099’s people received for being paid for tearing out their yards and putting in drought resistant landscaping. That too was an exclusion that had some gray areas but it never was an issue with the IRS because it made sense that it shouldn’t be taxable. It’s rare, but even sometimes common sense will prevail with the IRS. Good luck this season everyone.

What about ...

Check IRC Sec 61. There is no threshold as to taxability.

Obviously that’s the case. All income is taxable, which is why if it’s income to all, it should be reported on a 1099-G like the state refunds. That way all of our clients would receive a tax form that we as the preparer can rely on for accuracy. Instead
We have to rely on our client to provide the correct number.

What about all the people that received less than $600? It doesn’t seem right that we would tax our married couples or single parents but not all of the single individuals that received

FTB: The MCTR payment is not taxable for California state income tax purposes. Individuals do not need to claim the payment as income on their California income tax return.

However, the MCTR payments may be considered federal income. As such, a 1099-MISC for MCTR payments of $600 or more will be issued. It should not be presumed that because a taxpayer did not get a 1099-MISC, their payment is not subject to federal tax.