MCTR-MIDDLE CLASS TAX REFUND TAXABLE ON FEDERAL AND TAX FREE ON STATE

[10409000]

Hi, so according to the ftb website anyone who received more than $600 of middle class tax refund will receive a 1099-misc. so is anyone being proactive and adding the mctr as other income and then excluding it per notice 2003-18 "GENERAL WELFARE EXCLUSION" I learned we can do this while attending a awesome tax brass class. page 39 of the tax brass book. let me know your thoughts or if you forgot to add and exclude or if anyone has recd the actual 1099 forms. brass tax class explained that these mctr shouldn't be taxed by federal since its a governmental fund, are for promotion of general welfare example generally based on individual or family needs) and not compensation for service. 

[abctax55]

Spidell disagrees with that position. AFAIK, there's no official IRS position, yet.

As I don't start returns until Feb 1, I don't have an official position yet either.  

[BobKamman]

That 2003 IRS notice is certainly an odd way to answer the question. It’s an explanation of why payments to local businesses affected by 9/11 are taxed. Its only relevance is the paragraph (out of 10 pages) that distinguishes payments to individuals. So, let’s take a look at that:

“The Internal Revenue Service has consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not includible in a recipient’s gross income (“general welfare exclusion”). See, e.g., Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 840. To qualify under the general welfare exclusion, payments must: (i) be made from a governmental fund, (ii) be for the promotion of general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Rev. Rul. 75-246, 1975-1 C.B. 24; Rev. Rul. 82-106, 1982-1 C.B. 16. Payments to businesses generally do not qualify for the exclusion because they are not based on individual or family needs . . .[with citations].”

As I understand it, California will not express an opinion on whether these payments are income on the 1040; their opinion is only that to stay out of trouble with IRS, they are issuing 1099's with them. “The United States government has a tax on income, not on pieces of paper.” [Kamman] . Will IRS rule on this issue by next week, before the tsunami of returns? I doubt it. I prepare a few California returns, but not until March or April. So I have time to think about it. For now, my opinion is that the payments are not taxable.

Having said that, what are the states doing, that are distributing a budget surplus by sending out “rebates” of income tax collected, based roughly on how much each person paid? For example, Idaho and South Carolina. Are they reporting these to IRS as refunds? Should they? The California payments were based not on tax paid, but on AGI. Several other states did the same.

[rbynaker]

I'm also sitting on the fence on this.  I don't have many CA clients and the ones I do have are slackers (2021 returns were filed in October last year).  If we don't have an official IRS position by then I'll go with the prevailing winds.  Smells like "general welfare" to me.

VA did a tax rebate last year.  IMO that IS taxable to the extent of tax benefit received in a prior year.  The rebate required that you paid tax in the prior year and it was limited to the amount of tax paid.  Don't know about other states but I suspect the devil's in the details...

Rick

[Just-Lisa-Now-]

The amount really isnt very high, and only lower income people got it, the federal tax burden will be minimal, I doubt we'll see much work on this trying to get the feds to not tax it.

Sure isn't what they made it out to be in the beginning, so we got taxed on our huge gas prices at the pumps, now we get taxed on the "gas rebate" too.

[George4Tacks]

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=27184

[BobKamman]

They sent $600 to any married couple with a dependent and AGI under $500,000.  You can tell Lisa is from California when she says "only lower income people got it."

[BobKamman]

The best way to get a fast answer from IRS on an issue like this is to ask a Member of Congress to ask IRS about it.  I'm surprised that no constituent in Kevin McCarthy's or Nancy Pelosi's district has contacted them about it.  Even better, ask a Member with some influence in the House these days.  

[Just-Lisa-Now-]

was it that high of income?  ok, my bad.   The payments are relatively small though, I cant see it being a large enough tax burden for it to get the attention it needs to get the taxability changed.

[Just-Lisa-Now-]

The people that really needed this $$ boost were those on SS/SSDI with low fixed incomes, and no filing requirement and they werent included...terrible set up.

[10409000]

Today 01/19/22 a client just sent me a screenshot of the 1099-misc they received from the ftb showing $700. i added it to their taxes and it came out to about $84 federal tax..and another client was $232 of taxes.. (it reduced her eic)  I also called the ftb and they confirmed yes they have mailed out and still sending 1099-misc forms to people.. this is a pain in the butt! cause we will also have to remember to include 1099-misc for 2023 since some people are getting their mctr payments jan 2023 this month. so much extra works.

[BobKamman]

There are those who, when IRS says "Jump,"   ask "How High?"  

And then those who, when FTB says "Maybe Jump," answer "That 1099 You Sent Really Worried Me."

MCTR is like cancer.  Sometimes the best treatment is "watchful waiting."

[tina]

You're talking about something different.

[Kobebean]

Hi,

I have CA clients getting these 1099's. How do you exclude it from to general welfare? 

[Just-Lisa-Now-]

Youd make an adjusting entry on the Other Income line citing the IRC you're claiming it falls under.

[Kobebean]

Thanks

[BobKamman]

It's getting more difficult to argue against playing "trick the computer" games, when IRS itself is suggesting it with the 1099-K problem.  But you wouldn't tell someone who received a $20,000 gift to add it in and then subtract it out, even though it's being reported on a Form 709.  (We don't know for sure that they don't use those for audit leads, do we?)  My concern would be how FTB would view this when it has a different place on its forms for showing the exclusion.  If you're sure it's not a concern, then go ahead and increase the taxpayer's gross income when you don't know if some legislation is going to give an importance to that number that is not obvious now.  

Exclusions should not be added to income only to subtract them out.  Stay away from that slippery slope.  

[rbynaker]

---

@BobKamman wrote:

It's getting more difficult to argue against playing "trick the computer" games, when IRS itself is suggesting it with the 1099-K problem.

---

I agree.  I'm not a huge fan of the Sch 1 8z/24z in/out suggestion from the 1040 instructions.  I fully expect some sort of glitch involving a "Modified AGI" calculation somewhere, either in software or in the IRS systems.  <shrug>  One return at a time.

[BobKamman]

And then there is the "hobby loss" problem, as covered in this blog today:

https://procedurallytaxing.com/a-quick-hobby-loss-refresher-why-these-losses-are-useless-at-least-un...

I recently sold something on eBay for $50, which had a cost basis to me of $35.  (A gift, long ago.)  The eBay and PayPal commissions were $7 and the postage and packaging were $12.  What do I add to income, and what do I deduct?  

[abctax55]

Dave Fogel is one of THE smartest tax preparers around, and know CA inside/out:

https://img1.wsimg.com/blobby/go/310b78c2-6a3e-4922-acb3-709b44966191/downloads/CSEA-Fogel-MiddleCla...

His article gives a lot of substantiation to exclude the MCTR from taxable income for Federal purposes.

YMMV & consider disclosures.

[BobKamman]

“Hopefully, the IRS will issue guidance in the future that reaches the same conclusion.”

From Wikipedia: Hopefully is an adverb which means "in a hopeful manner" or, when used as a disjunct, "it is hoped". Its use as a disjunct has prompted controversy among advocates of linguistic purism or linguistic prescription. Merriam-Webster says the disjunct sense of hopefully dates to the early 18th century and had been in fairly widespread use since at least the 1930s. Objection to this sense of the word only became widespread in the 1960s. Merriam-Webster says that this usage is "entirely standard". Before 2012, the AP Stylebook proscribed the use of "hopefully" as a disjunct.

So, I won’t complain about hopefully. We don’t yet have an IRS commissioner, so the mental image of him looking hopeful while making an announcement is difficult to conjure.

However, when else would IRS issue guidance, if not “in the future” ? I assume the author is not being paid by the word. Maybe I shouldn’t. In any case, I will defend my position that exclusions should not be added in to income on a return only to be subtracted out. Practitioners aren’t going to charge for this? Their clients are being bamboozled.

[Skylane]

Any questions about why thousands are leaving Cali and moving to Texas?

[Just-Lisa-Now-]

Wish more of them would go, too many people here!

[BobKamman]

Any questions about why thousands of Texans leave for California every year?

Newcomers to California . . . tend to be more educated and make more money. “Those who move to California also tend to have higher education levels than those who move out — an especially important factor given the state’s strong need for college graduates,” Hans Johnson of the Public Policy Institute of California wrote. A glance at software engineering salaries says it all. A freshly minted college graduate in computer engineering from the University of Texas at Austin might make, on average, $500,000 working in Los Gatos, west of San Jose. Austin, meanwhile, doesn’t even make a list from this year of the 25 top-paying markets for software developers (markets in which average salaries start at just over $200,000).

Data provided by Allied Van Lines hint at those economic incentives for the wealthy, showing residents of upscale Texas ZIP codes in Katy, The Woodlands, Austin and Dallas moving to even more upscale California ZIP codes including those in Los Angeles, Newport Beach, San Jose and San Francisco.

https://www.latimes.com/opinion/story/2022-10-17/california-texas-migration-why-people-move#

For those concerned about the net migration of 0.2% of Californians, the bottom line is housing costs:

Between 35,000 and 40,000 Texans move to California every year no matter what. It was a little lower during the Great Recession of 2007-2010, but it didn’t change during the drop in oil prices that began in late 2014. In other words, the Texan migration to California is steady and doesn’t seem to be driven by larger economic forces. Whether that’s Texans going to the University of California or surfers or aspiring actors, we don’t know. But the flow is steady and predictable.

The movement in the other direction — California to Texas — looks pretty different. It ebbs and flows. Even during the last recession, it wasn’t consistent, fluctuating up and down pretty considerably. And in the past two years, it has shot up to a level not seen since 2006. In 2018 and 2019, a little over 80,000 Californians moved to Texas. (Again, for perspective, that’s about two-tenths of 1% of California’s population.)

But why is this really happening? Admittedly, California has had a rough couple of years, but the fluctuation is considerable, and it doesn’t seem to be related to the price of oil (i.e., economic opportunity in Texas). If oil prices were a factor, we would have seen a big dip in 2014-2016. (Instead, during that time, California migration to Texas went up.)

As it turns out, the answer is simple. The driving force is not a pull into Texas but a push out of California: home prices.

https://kinder.rice.edu/urbanedge/it-seems-all-california-moving-texas-true 

[TAXMANPAT]

It is California, New York an a handful of other urban centers role to pay the morally superior welfare states bills! This puts McCarthy in a pickle.  Look at SALT. If congress has a say, it'll be taxable. If that's the case maybe middle america can send a thank you note.

[Skylane]

I didn’t mean to start a political debate. Just my poor humor and the tongue-in-cheek remark. IMO Cali and New York have the most complicated tax codes in the nation.

[10409000]

I HAVE PROSERIES PROFESSIONAL AND DID YOU GUYS JUST NOTICE THE UPDATE?? FEDERAL FORM NOW AUTOMATICALLY EXCLUDES THE MCTR !!! YAY!!!! 

[Just-Lisa-Now-]

Last I looked it excluded it (the entire thing disappeared) from both fed and state, I dont think that's correct. 

IF, and thats IF IRS announced that they would consider it not taxable (and I havent seen that anywhere), then it should have the amount shown and then backed out again, with it just disappearing, why bother to even enter it.

[10409000]

ON schedule 1 it adds it as other income and then automatically excludes it and it puts in the words "general welfare exclusion" on its own. so on 1040 it dissapears but its still on schedule 1 to show the entry and exclusion. 

[BobKamman]

On the other hand, we haven't seen anywhere an IRS announcement that it is taxable.  Clearly they are struggling with this problem.  Because, after all, they aren't very good at answering tax questions.  

[Just-Lisa-Now-]

then maybe its been updated since I last looked, thanks!

[BarryR]

Turbotax adds and subtracts the income on line 8z of Schedule 1 when you enter the 1099-Misc.

[abctax55]

@BarryR 

So?

[singh]

1099 misc for MCTR. The amount you enter on the form 1099-misc Income Worksheet will not automatically

disappear unless you check mark the Box 3  'Yes' FOR ca Middle Class Tax Refund. This refund is not taxable for CA nor for Federal. 

[abctax55]

@singh 

 nor for Federal. 

Please cite your authority for this statement as there are *several* differing opinions and the IRS (AFAIK) has yet answered the question posed directly by Spidell.

[singh]

I have tried it and it worked. First I entered all information on 1099 misc and entered  $700.00 on BOX 3  and check marked 'Other income' there was $84.00 tax to be paid to IRS. 

Then I unchecked the 'Other Income' Box, check marked 'YES' Box CA MITC the infor. automatically got transferred to Schedule 1 Line 8 z , and there was no tax due.

[singh]

Yes, that is true. I have tried it.

[singh]

MCTR. Unfortunately people received the 1099MISC showing an amount on BOX 3 as 'Other income' and that confused tax preparers how to avoid the tax. We need to carefully read through all infor. on 1099 MISC  for Bax 3. As I mentioned earlier that this amount is not taxable for CA nor for IRS. 

[abctax55]

@singh 

Just because you can manipulate the numbers doesn't mean it is the correct thing to do.   OR that the software is correct.

DO you have a cite for justifying that the IRS has definitely determined this is not taxable income on the F 1040?

[singh]

Mr ABC55.  Only time will tell. Lets have patience and the issue will be solved FAVORABLY.

[abctax55]

nor for IRS.

@singh  

Until & If/When you can provide a cite for this position, please refrain from such statements.

The IRS has not yet weighed in.

IF you want to go this route, feel free.  I hope you are disclosing your position on the tax returns you are filing now.

It is entirely possible and perhaps possible the IRS *will* issue a statement that this is not taxable under the 'welfare' rule.

They haven't, yet.

Edit.. Bob pointed out my error. Substitute probable for possble somewhere in my comment. 

[abctax55]

@singh 

I also hope so.  But posting blanket statements that it IS NOT TAXABLE on this public forum is not acceptable.  Unless you DO have that cite I've asked for.

[BobKamman]

@abctax55 "It is entirely possible and perhaps possible"

Well, make up your mind. Until IRS does, I think anyone can post an opinion or prediction here. After all, the "Community Guidelines" remind all of us,

" Remember, this is user-generated content.

You'll find plenty of good advice here, but remember that your situation, configuration, or implementation may vary from that of the individual sharing a solution. Some advice you find here may even be wrong. Apply the same good judgment here that you would apply to information anywhere on the Internet."

What I wonder is what the preparers are doing, for the clients whose MCTR was less than $600.  Making sure those get reported also?  

[abctax55]

Fine, Bob. 

Blanket statements without substantiation need to be challenged.

At least that's my opinion. 

[BobKamman]

Opinions are like as bellybuttons, everyone has one

[singh]

Thank you, BobKamman, so much for your educated comment. I agree one hundred percent that anyone can post his/her opinion, ideas, prediction and examples of how they handled a particular situation, and it is upon the individuals to apply their best judgment. I would never ask anyone what to post or not to post on this site. Its not under my jurisdiction.

I only tried to help out by giving an example of what I did to resolve the taxable/not taxable issue regarding 1099MISC for MITC.

[singh]

There is NO manipulation of any numbers. Its all about what to input and where: 1099 MISC WORKSHEET BOX 3 and answer 'YES' , everything works out well. The software does it all, not me.

[abctax55]

This refund is not taxable for CA nor for Federal. 

That doesn't look like an "opinion"; it appears to be a statement of fact.

All I'm asking for is a cite - which is tough as one doesn't exist right now.

[jerry]

Yes, but I just tried it in Lacerte.

The original $700 on the 1099-MISC and the offsetting $700 add up to zero (obviously), so Lacerte doesn't show a Schedule 1 in the completed return.  I don't know if it will be electronically transmitted or not, but if not, the AUR computers will have nothing to match to, and notices will go out.

I'd hate to claim a negative adjustment of $1 less just to get a Statement for Schedule 1 to generate.

Interestingly, TurboTax, another Intuit product, automatically puts both the original amount and the offset (using terminology "general welfare exclusion") on statement for Schedule 1, line 8z

[qbteachmt]

"Yes, but I just tried it in Lacerte."

That doesn't matter. Neither does trying it with TurboTax. You seem to be thinking your software is ready to go.

Until the IRS declares how it is to be treated, it doesn't matter which program you enter it into or how you enter it there or how anything is handled.