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

Technical topics regarding tax preparation.
#41
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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.
 

#42
EZTAX  
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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
 

#43
Nilodop  
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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
.
 

#44
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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.
 

#45
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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.
 

#46
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EZTAX wrote: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?
 

#47
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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.
 

#48
Frankly  
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Mwgallego wrote:What about ...

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

#49
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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.
 

#50
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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.
 

#51
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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.
 

#52
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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.
Vere Chappell, EA
Mobile Tax Service
Orange County, CA
 

#53
EZTAX  
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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.
 

#54
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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?
 

#55
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Whestsider wrote: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?
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#56
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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.
 

#57
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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.
 

#58
sjrcpa  
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Narrower view on the General Welfare Exclusion
http://21stcenturytaxation.blogspot.com/
 

#59
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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.
 

#60
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TAXMASTER wrote: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?
 

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