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

Whether they got less than $600 (no 1099) or $600 or more (1099-MISC), this discussion shows that there are two excellent arguments for excluding the payments from Federal gross income: (1) the general welfare exclusion, and (2) section 139.

I know this is not authoritative, but Intuit seems to have taken the position that the MCTR is not taxable federally.

For TurboTax, see: https://ttlc.intuit.com/community/taxes ... e#M1025509

For ProSeries, there is a box on the 1099-MISC entry screen to check whether the payment is the MCTR. If this box is checked, $0 is entered on line 1 of Schedule 1, regardless of the amount entered for Box 3 of the 1099-MISC.

Personally I would feel more comfortable entering the amount from Box 3 on the 1099-MISC on Line 8z of Schedule 1, then reversing it on line 24z. I wonder if just entering $0 will trigger an automatic CP2501 notice for not including the 1099-MISC in the return.

What a mess.

Sandy at Spidell posted that they are hoping for IRS guidance by next week. Sure would be nice to get this issue off the pile and get on to all the others.

Here in Indiana, taxpayers received an automatic tax refund in the amount of $325. This is a return of tax dollars collected in the past that exceeded its budget by a certain amount. Indiana law mandates this refund. The only requirement is that the taxpayer had to file a 2020 full year resident Indiana tax return. Indiana has done this in the past (about 10 years ago) with no issues and was treated like any other tax refund (i.e., previous year Schedule A). Indiana has reported this on the 2022 Form 1099-G. Several Indiana returns had already been filed before the Feb. 3rd IRS announcement, using 1099-G treatment. Any thoughts?

Several Indiana returns had already been filed before the Feb. 3rd IRS announcement, using 1099-G treatment. Any thoughts?

What is "the Feb. 3rd IRS announcement" about? Can you provide a link?

Home-News-IRS Statements and Announcements IRS Statement — Taxability of State Payments

Feb. 3, 2023

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.

This never ends, does it?

It seems every year just as I get rolling on preparing returns the IRS changes the rules and throws everything into chaos.

This time, they never even bothered to make a ruling in advance. 92% of my clients are in Mass, Maine and CA.

The Maine $850 payments were intended to be fully tax exempt as Post Pandemic payments (Mainers can be very creative) when issued, CA said their $350 rebate is probably taxable to the Feds, and the MA 62F rebate I just assumed would be handled the same as any other state tax refund, since the rebate was calculated as a % of their state tax.

But now we have to wait for the IRS to "clarify".

How did we get into February without this being fully "clarified"?

My first 5 MA clients don't remember how much their refund was, or even if they got one, and say they did not get a 1099G. Now I have to compute it for them if it is taxable.

Or I could "consult with a reputable tax professional". Pretty funny.

Narrower view on the General Welfare Exclusion
http://21stcenturytaxation.blogspot.com/

IRS gets it right: https://www.irs.gov/newsroom/irs-issues ... -taxpayers

During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information.

IRS gets it right: https://www.irs.gov/newsroom/irs-issues ... -taxpayers

During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information.

Great news,

Then it leads to the next question: Do we just ignore the California Form 1099-MISC or do we still report it and then use a negative entry to back it out?

Do we just ignore the California Form 1099-MISC or do we still report it and then use a negative entry to back it out?

The IRS news release says that taxpayers need not report the payment on the return. However, if the amount was $600 or more, and the taxpayer received a 1099-MISC, then I believe it would be prudent to report the amount on Form 1040, Schedule 1, line 8z, then back it out on line 24z with the explanation "General welfare exclusion per IR-2023-23."

The problem is, who has actually received a 1099-MISC? So far, half of the people told me they received a 1099-MISC and the other half said they did not. Then half of those who said they did not probably might have received it but either got it misplaced or the form got lost in the mail. So where do you draw the line to report the payment and not to?

$600

That might not be where a good line to draw because some taxpayer who received $350 mctr also got a 1099.

We have seen no 1099s for less than $600 and many for $700 or $1050. We have been reportling all MCTRs and netting them out as suggested by NoCal above. So glad we do not need to go back and redo all the completed returns that are waiting for pickup!

https://www.irs.gov/newsroom/irs-issues ... -taxpayers

Then half of those who said they did not probably might have received it but either got it misplaced or the form got lost in the mail. So where do you draw the line to report the payment and not to?

You ask for the amount which they can find from their bank account, and report as if they have received the 1099-misc form.

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

Fogel helped my office on a difficult client matter years ago and was a pleasure to work with. I found your post because I was trying to look him up again.