IL Rebates - IRS Guidance Causing Complication?

[Frustrated-in-IL]

I read the guidance IRS put out regarding the rebates received in many states.  Since I am in IL, I noticed the footnote at the bottom regarding IL.  If I am understanding this correctly, IRS is considering the personal rebate ($50 per taxpayer, $100 per dependent) as a general welfare payment and not taxable.  However, I am understanding the real estate rebate is to be considered a refund of property tax paid (not income tax even though the amount generally equaled the real estate tax credit given on the income tax return as originally filed for most taxpayers).

If my interpretation is correct, then a couple things are happening.  First, the 1099-G forms issued by the state of Illinois which include two lines, one for the original tax refund for 2021 and an additional line for the total rebate (both personal and real estate), is incorrect and should only reflect the original tax refund.  Second, if the taxpayer did not itemize in 2021, then this entire exercise is moot as nothing will be taxable (and IL would not have issued any 1099-G).

However, if the taxpayer itemized, a 1099-G was issued and needs to be dealt with (specifically the first line showing the income tax refund-I am assuming they will issue corrected 1099-G forms).  And this is where the complication comes into play.  The real estate rebate, now designated as a property tax refund, is a second type of itemized deduction recovery.  I do not believe the state income tax refund worksheet within the program can handle this situation and needs to be disabled.  However, by doing so the entire state tax refund shows up as taxable.  That may be the true in some cases but if total taxes paid exceeded $10000, it will not be true.  To compute the correct amounts, I believe one has to use Publication 525, specifically worksheets 2a first, and then worksheet 2 second, to determine the amount of the state income tax refund, and the amount of the property tax refund, which are taxable.

Once those amounts are known, and the state income tax refund worksheet is disabled, then I believe the state income tax refund which is taxable can be entered on the carryover worksheet (and will find its way to Form 1040, Schedule 1, line 1).  The amount of the property tax refund which is taxable can be entered on line 7 of the other income statement, which reports it properly on Schedule 1, line 8z.

If I am correct so far (a BIG if), then my concern is there is nothing attached to the return, like the state income tax refund worksheet, which reconciles the 1099G (assuming IL issues corrected 1099G forms) to the amount shown on the return.  I am thinking about creating a pdf containing both worksheet 2a and worksheet 2 and attaching it to the return.

Am I missing something within the program that can simplify this?  Am I way off base? Or does this seem correct and reasonable?

[garman22]

I see the same thing re: taxability. 

For me and mine, I am thinking about disregarding that part of the rebate that may or may not be taxable. Most individuals that I prepare no longer itemize. Only a handful of my married individuals and a few more single individuals do so. 

If the IRS wants their few dollars, let them send notice. I've asked a few clients and all so far stated file and we'll deal with any correction notices down the road. Im willing to bet donuts against dollars that will NOT happen. 

Thats for me and mine........

[BobKamman]

Your first mistake is asking intelligent questions about stupid answers.  IRS is not offering amnesty, they are offering amnesia.  Just forget about all this.  

But the way I read it, the income tax rebate is "general welfare" and not taxable.  So the 1099-G is correct. It's the property tax rebate that might be taxable, if a tax benefit was derived from claiming property taxes as an itemized deduction.  I don't think you have to fill out a worksheet for that, just report it on the "other income" line. Schedule 1, line 8z, not line 1. 

People got the $50 "income tax rebate" even if they didn't pay any income tax, right?  And they didn't get it, even if they paid a lot of income tax because their income was more than $200K, right?  So it's a Robin Hood Rebate.  Take income tax from the rich, give it to the poor.   

[Frustrated-in-IL]

The more I look at this, it seems a much simpler way to deal with this in IL would be to take the total amount on the incorrect IL 1099G and subtract that portion which represents the personal rebate.  That would leave the 2021 IL tax refund plus the property tax rebate.  If that amount is entered as the state tax refund on the carryover worksheet, the program will correctly calculate the amount which is taxable.  Of course, it will incorrectly put it all on Schedule 1, line 1 and nothing on schedule 1, line 8z.  But in total it will be correct.  There would be no needed to disable the state income tax worksheet and no need to complete or attach the Pub. 525 worksheets, eliminating needless complexity.  The full taxable amount will be reported, albeit on an incorrect line.  And as an added benefit, it will eliminate the certainty of a notice from IL, who seemingly always disallows subtractions for recoveries of itemized deductions other than an IL state income tax refund (though explaining to them it was the federally taxable portion of something IL said wasn't taxable to IL in the first place would surely confuse the heck out of them).

I believe this will work where the only itemized deduction recoveries are the 2021 state income tax and the property tax rebate. Haven't played around with it when there are non-tax recoveries.

[BobKamman]

Are you saying the income tax rebates were included in the 1099-G forms, but not the property-tax rebates?  I've seen an unreported 1099-G generate a CP-2000 when the amount is something like $2,000 and the tax consequence is more than $500, but IRS is not going to fuss about a difference of a few hundred dollars.  Their computers aren't set up to calculate a worksheet that figures if a tax benefit was received in a prior year.  With the $10K SALT limit, they would be wasting their time to try it now.  IRS will be staying away from this issue as much as possible, they know they screwed up.  

[garman22]

Completely agree @BobKamman 

[taxes96786]

"If the IRS wants their few dollars, let them send notice"  My inclination is to agree with you but...if you don't report a 1099 IRS will send a notice and attach a non-payment of tax penalty with interest. Best to report it and see what happens. There is enough "stink" being raised about this issue I would not be surprised if the IRS backs off on taxing what was not intended to be taxed. State rebates usually are not taxed because they are considered past taxes paid that is being returned.

[BobKamman]

The notice isn't going to include penalty unless the tax owed is at least $5,000.  For what's at issue here, the interest on a $100 assessment (which isn't going to happen anyway) would be about $10 during the height of CP-2000 season, fall of 2024.  

The sky is not falling.  

[Frustrated-in-IL]

The 1099G forms include one line for the tax refund amount and it is identified as a 2021 refund paid in 2022.  Then there is a second line with an amount which equals the personal rebate plus the property rebate.  In other words, the total amount IL paid out for rebates.  This line is also identified as a 2021 refund paid in 2022.