Error form 1099 Misc California Middle Class Tax Refund-

[shercri]

Has anyone encountered this error on Proseries  Basic; It shows "select Yes and amount will be excluded from federal income" when it should be for state only. What to do?

[shercri]

[ljsmith2]

Thank you for sharing this. I had been checking the box for "Other Income" on the 1099-misc input form, making my own adjustments and hadn't noticed.

When I do this, it removes the income all together, Federal & Calif.

Will we see a document mis-match from the IRS?

I may continue to make my own adjustments simply for this purpose. No need for clients to get a letter. 

[sjrcpa]

Will we see a document mis-match from the IRS? Maybe

Are you sure it's taxable at the federal level?

https://proconnect.intuit.com/community/proseries-tax-discussions/discussion/mctr-middle-class-tax-r...

[BobKamman]

On the other hand, no reason for clients to pay tax on something that is excluded from income. 

The amounts are low enough that, by itself, the MCTR won't generate a CP-2000.  But if there are other omissions on the return, it may or may not be included in the computation.  I am hoping a lot of California practitioners insist on filing returns paying tax on this today, because that makes it more likely that there will be an announcement from IRS tomorrow.  

[TaxGuyBill]

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@ljsmith2 wrote:

When I do this, it removes the income all together, Federal & Calif.

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Yeah, that is interesting.  If you check the box that it is the Middle Class Refund, ProSeries just keeps it off of the tax return. 

Based on that, ProSeries is apparently saying it is non-taxable, which is a rather intriguing thing, since the software should not be making such decisions that are unclear.

[ljsmith2 · Accepted solution]

I advise my clients where we stand on the MCTR for Federal and give them the options...wait...pay tax on it... or exclude,  but I lean toward reporting the income, then back it out to prevent the document mismatch. In the end, I let them decide but most will go with my recommendation to exclude.

I just wont check the box in ProSeries that removes the income all together, doing it manually.

I am noticing that taxpayers that receive their debit card in January 2023 are still getting a 1099-Misc for 2022. Since it was not available to them in 2022, it should not be reported on the 2022...but again, for document matching...will put it on the tax return.

[sjrcpa]

"ProSeries is apparently saying it is non-taxable, which is a rather intriguing thing, since the software should not be making such decisions that are unclear."

The software is letting you make the decision. You don't have to check that box.

[craig]

Spidell thoughts are that the income is taxable on the Federal level.

Their thoughts until the IRS says the income is tax exempt the income is taxable

[TaxGuyBill]

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@sjrcpa wrote:

"ProSeries is apparently saying it is non-taxable, which is a rather intriguing thing, since the software should not be making such decisions that are unclear."

The software is letting you make the decision. You don't have to check that box.

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No, the check box just says California Middle Class Refund, "Yes" or "No".  The natural reaction would be to check that box because that is what it is (it also has check boxes for things like the Olympics, etc.). 

It does not state "do you want to exclude" the California Middle Class Refund.

[TaxGuyBill]

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@craig wrote:

Spidell thoughts are that the income is taxable on the Federal level.

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That was their first thought, but after that they send another statement saying 'maybe'.  Or is there a third statement that changes their thought?

[BobKamman]

“ In a podcast, Spidell Publishing, LLC, a private California tax analysis and education company that is well-respected in California, stated that the payments are taxable for Federal income tax purposes.

However, subsequently, Spidell acknowledged in its tax update manual that the general welfare exclusion could possibly apply.

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.“

https://www.bogleheads.org/forum/viewtopic.php?t=395019

[Just-Lisa-Now-]

Its making it non taxable for federal if you mark YES its the MCTR, so that's NOT letting you make the choice.

Im wondering if this was an attempt to make it auto deduct on the 540 CA but its deducting it from both instead.

[shercri]

These are the steps to manually exclude it from state but add amount to federal income without checking the yes box.  Dont want to have clients receive IRS letters.

Any other tips are appreciated. Thx

[KeithinSanDimas]

From Brass Tax:  "IRS has consistently concluded that payments made to individuals under social benefit programs for promotion of the general welfare are excluded from income provided the payments meet the following requirements:

1) Made from a governmental fund

2) Are for promotion of general welfare (i.e. generally based on individual or family needs)

3) Not compensation for services

[BobKamman]

From the SF Chronicle:

The decision to issue 1099s surprised some tax professionals, because the state did not send those forms for the Golden State Stimulus payments it issued to low- and middle-income residents (up to $75,000 in annual income) in 2020 and 2021 for coronavirus relief.

The state did not issue a 1099 for those payments because it believed they qualified for a federal tax exemption under Section 139 of the Internal Revenue Code for disaster relief funds, Spidell Publishing, a provider of tax information for professionals, said in a note to clients and in a podcast.

“We believe those Golden State Stimulus payments qualified for a federal gross income exclusion under either IRC Section 139 or the general welfare exemption under federal law,” Spidell said.

It’s not clear whether the new payments would qualify for either of those exemptions.

On its website, the state tax board advises recipients to “consult the IRS or your tax professional regarding the federal tax treatment of these payments.”

The IRS could not provide a clear answer. “I can tell you, we are aware of it. California is not the only state doing this,” IRS spokesman Raphael Tulino said.

The only answer Tulino provided was this excerpt from IRS Publication 525. “In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but isn’t taxable.”

https://www.sfchronicle.com/california/article/inflation-relief-payment-federal-tax-17625427.php 

[JRC]

The State of California says to consult with your tax preparer!

LOL

[CAtud]

Thank you....very much.  It works