California MCTR Updates

[BobKamman]

Starting a new thread so those following this topic don't have to wade through others that are older and lengthier.

"The IRS issued this statement to KCRA 3 on Friday: "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."

The agency said it recommended that people wait until that 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," the agency said. "We also do not recommend amending a previously filed 2022 return." "

https://www.kcra.com/article/rep-kiley-calls-for-irs-to-issue-guidance-on-whether-middle-class-tax-r...

In other words, Californians don't get an answer until Idahoans get their answer too.  

            Old California tax preparers don't die, they just have their franchise expire.

[sjrcpa]

https://www.irs.gov/newsroom/irs-statement-taxability-of-state-payments

The official statement

[BobKamman]

California's two US senators told IRS today what they think about this:

https://www.feinstein.senate.gov/public/_cache/files/e/0/e0254b33-4b09-4a01-a1bf-8424243c5ca9/743C4B... 

[AJ12]

I'm a tax professional in California.  The IRS has said to wait until it makes a decision on whether or not the California Middle Class Tax Refund is taxable or not.  Well I've taken the position that I'll file my client's Federal tax return and include a statement indicating just how much "Refund" the client(s) received and a copy of the 1099-MISC.  I'm disclosing the amount received, a copy of the 1099-MISC and even a note what the additional tax (if applicable) would be by including the "Refund". I also indicate an Amended Return will be filed if / when a decision is made ... unless the IRS will be making the necessary adjustments.  

I can't see holding up a client's refund by waiting for the IRS to make a decision on the taxability of what appears to be a NON-TAXABLE event.  The Stimulus checks weren't taxable and the "Refunds" issued by the state of California was to relieve Californians of the "Runaway Inflation". I'll truly be surprised if the "Refund" will be taxable and can see possible litigation should the IRS tax it.

[BobKamman]

Spinning your wheels and probably delaying your clients' refunds.  Put yourself in the shoes of Block's state director.  They can't afford to tell thousands of customers every day to come back next week and maybe they'll have an answer.  They're adding in the MCTR in one place and subtracting it out in another.  Move on to the next one.  

IRS has never enacted a law in its history.  Its delayed opinion might be persuasive, but not the final word.  If it wants to interpret the law that Congress passed and the President signed to mean that these refunds are taxable, then you're correct that litigation will follow.  Or even in a gridlocked Congress, a law will be enacted to clarify that such payments are excluded.

I came across a list of the 19 states where there are issues similar to this one in California.  They are: 

Alaska, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, and Virginia.

[BobKamman]

It’s not the Los Angeles or San Francisco newspapers that are carrying the ball on this story. It’s the Sacramento Bee (its stories also appear in their Fresno and Merced newspapers). They have managed to get some good quotes from a Sacramento-area Congressman, one of the few Republicans that the state has sent to Washington:

U.S. Rep. Kevin Kiley is pushing the Internal Revenue Service once again to issue guidance on whether or not Californians need to claim Middle Class Tax Refunds issued in 2022 as income on their tax returns.

“Many taxpayers plan for, and depend on, their anticipated federal tax refunds to meet basic needs,” Kiley wrote in the letter issued on Feb. 7. “Delay is something not everyone can afford.” The IRS did not immediately respond to The Bee’s request for comment Tuesday.

Kiley issued the first letter last Thursday to the IRS urging guidance on whether the MCTR would be federally taxed, citing The Bee’s report of confusion among Californian taxpayers. Multiple spokespeople previously told The Bee guidance would be issued in the next “few business days.”

https://www.sacbee.com/news/politics-government/article272243413.html#storylink=cpy

(The story also links to an article in a newspaper owned by some Australian guy.)

[AJ12]

Question would be:  I know how the to show the income. Where and what reason is used to "take it off"?  I think I like my method better. Just prepare a "Pro Forma" statement  and adjust for each client's situation.

All I know is NO ONE should wait until the IRS makes up its mind it this is taxable income!  It's a joke that they would suggest such a thing.

[BobKamman]

I agree it's stupid to add something  on Schedule 1 and then subtract it on the same form.  We tax income, not pieces of paper.  But there are those who think every 1099 needs to show up on a return, and that's what they are doing. 

I have never seen a CP2000 generated by a $250 adjustment, which is the most that's involved here if IRS decides to tax it, but maybe if there is another missing item it could be an issue.  In that case, they would ignore your explanation anyway.  I would say it's just as likely for IRS to audit returns that show weird adjustments on Schedule 1.  Or, at least delay their processing until someone takes a closer look.  

When your doctor taps your knee, there's not much you can do about the knee-jerk reaction.  But when your client brings you a 1099 for something that is nontaxable, you can train your knee not to jerk.  

[sjrcpa]

Virginia, however, is calling theirs an income tax refund.

https://www.tax.virginia.gov/rebate

[rbynaker]

---

@sjrcpa wrote:

Virginia, however, is calling theirs an income tax refund.

https://www.tax.virginia.gov/rebate

---

And including it on the 1099-G.

[BobKamman]

That might be why IRS National Office was blindsided by this.  They figured California was the same as Virginia, where many of them live.  (It's more conservative than DC and Maryland, and IRS employees are more conservative.)  Not only did Virginia call it a rebate, but it looks like it only went to people who paid state income tax.  It's not clear to me, though:  If your tax liability was only $100, did you still get the $250?  Or was it limited to the $100?

[rbynaker]

---

@BobKamman wrote:

That might be why IRS National Office was blindsided by this.  They figured California was the same as Virginia, where many of them live.  (It's more conservative than DC and Maryland, and IRS employees are more conservative.)  Not only did Virginia call it a rebate, but it looks like it only went to people who paid state income tax.  It's not clear to me, though:  If your tax liability was only $100, did you still get the $250?  Or was it limited to the $100?

---

It's limited to the prior year tax.  So, in your example, $100.  No prior year tax = $0 "rebate."  Didn't file your tax return on time?  $0.  Pretty clearly a tax refund IMO.  In most of the cases I see either the taxpayer didn't itemize in the prior year or they were over the SALT limit.  The "problem" being that all tax software I know of will automatically carry over the prior year state tax refund as a 1099-G and almost all of my carryovers will not match the actual 1099-G.  I think I mostly don't care but have review procedures in place to catch the few cases I do care about.

[rbynaker]

If we're keeping a scorecard somewhere, I heard from a colleague today that the SC program was similar to VA.  So that's 2 of 19 that likely go into the "tax benefit rule" bucket for tax refunds.

I still see professionals with strong opinions in both directions regarding CA.  Looks like the answer for most folks is file quickly on TurboTax before the IRS can make a ruling.  If they want more money later they'll send you a bill (or not).  Well, probably only if you were lucky enough to get a 1099-MISC.

[sjrcpa]

@BobKamman    You got a mention!

21st Century Taxation: More on California MIddle Class Tax Refund

You're in good company with Annette. I have served with her on an AICPA Committee.

[rbynaker]

Yeah, I like Annette, I'm on another group with her.  While I agree with her that calling $500,000 of income "middle class" is pretty ridiculous, I recognize the state legislature's authority to define it as they please.  Most of her argument seems to be that the program wasn't fair.  Can't exactly dispute that either, her points are completely valid.  But with state-based EIC programs in place in many (most?) states at this point I don't see this as being much different.  Most states require a tax return filing for EIC payments (which have been deemed non-taxable general welfare).  The state doesn't walk around handing out food stamps (or maybe they do in CA, who knows) so simply being needy doesn't get you a general welfare benefit, you have to meet the conditions of the program and apply for the benefits.  The conditions on this CA program were dumb and only applied to people with an appropriately souped up DeLorean who could go back in time and file a CA return even though the instructions told them not to.

Meanwhile, tax season has started and if the IRS wanted these to be taxable they should have given the TurboTax programmers a heads-up.  I'm sure thousands of returns have been filed excluding this income (right or wrong).

[BobKamman]

Her January 29 post argues that the MCTR is taxable because it is not “for promotion of the general welfare meaning it is based on need.” But is that what it means? Do we need to look to Hamilton and Madison to find out why the US Constitution gives Congress, in the Taxing and Spending Clause, the power to promote “the general welfare?” There’s some interesting history at this Wikipedia page:

https://en.wikipedia.org/wiki/General_welfare_clause 

Long story short: Supreme Court concedes “general welfare” means what Congress wants it to mean. California doesn’t use the term in its Constitution, at least in a way related to this issue, but the current interpretation of the federal provision would be persuasive. “Welfare” doesn’t just mean helping poor people.

[rbynaker]

Another Bob mention in this Forbes article:

https://www.forbes.com/sites/ambergray-fenner/2023/02/06/are-state-tax-payments-federally-taxable-it...

I agree it's ridiculous that we're three weeks into filing season and don't have an answer to something that could have been determined in July.  Or December.  Or even the first three weeks of January.

[BobKamman]

What would I do without my friends to keep me up on where I'm mentioned?  Maybe, use Google searches?  I hear that Bing is getting better at that too.  The unfortunate mistake in the Forbes essay is that the second reference refers to me as O'Donnell.  That's the name of the Acting IRS Commissioner, but also my ex's spouse.  

[joshuabarksatlcs]

FYI, @BobKamman 's original post cited KCRA3, which is a Sacramento station.   

I simply treat MCTR as a tax refund.  If the FTB had sent out 1099-G's (like some other states), there wouldn't be this gusty wind in the tax teacup.  

The practical matter is this: IF the IRS doesn't specially mark the FTB 1099-MISC's and instead simply put them in the pool of 1099-MISC and follows up, it could trip up inquiries or some form of audit letters for SOME CA taxpayers.

As a practical matter, I'm not waiting for IRS clarification.  In Lacerte, even if we enter the amount and back it out, Sch 1 would NOT be generated anyway - that is, unless there's another Sch 1 item.  

I know my clients.  A few of them would rather pay tax on it instead of taking ANY risk because they have to breathe into a bag when they have to open ANY IRS letter.  When they do get a letter out of the 1099-MISC and bring it to my attention, they have to breathe into a bag when they write me a check to resolve a non-problem.  For those, I let them decide.  For myself and clients who have written off the state income tax, I'd enter it as taxable.  Fair is fair.  For most others, I just enter the amount and back it out for a NON-GENERATED Sch  1 in my record.  

Then, until the gusty wind dies down, I use the tax teacup for my daily regimen of bourbon.  

[sjrcpa]

I noticed that Forbes error, too. There were also a few others in that piece. 

But hey, any publicity, right? 😉

[tctxldy]

any updates yet on the federal taxability of the state stimulus?

[BobKamman]

It's past 5pm at 1111 Constitution Avenue NW and all the car pools have left.  No word on what IRS thinks of various payments made by various states, as they promised to tell us last week.  Maybe they will be working on this from home, over the weekend, instead of watching the Super Bowl?  Meanwhile, another state is heard from.  Colorado was passing out $750 to nearly everyone last year 

https://www.cbsnews.com/colorado/news/us-representatives-fire-off-letter-irs-might-tax-tabor-refunds... 

[rbynaker]

We've had two nice days in a row so no surprise not much got done across the Potomac.  I even managed to get in an outdoor game of pickleball today.

Somehow over the course of a week I've seen news reports go from 17 affected states to 19 and now to 22.  But most "news" in the 21st century revolves around getting the most shock value with as few words as possible and little-to-no actual research.  Pretty soon this will blow up to be a problem in all 56 states. 🙂

[rbynaker]

We spoke too soon.  An announcement just came as part of my weekly e-News.

https://www.irs.gov/newsroom/irs-issues-guidance-on-state-tax-payments-to-help-taxpayers

[BobKamman]

They have outsourced it to private enterprise.  "Since this is what TurboTax and Block decided weeks ago, we'll go along with it."

General welfare and disaster relief payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations.

The IRS has reviewed the types of payments made by various states in 2022 that may fall in these categories and given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

• Alaska [1]
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois [2]
• Indiana
• Maine
• New Jersey
• New Mexico
• New York2
• Oregon
• Pennsylvania
• Rhode Island

For a list of the specific payments to which this applies, please see this chart.

[sjrcpa]

Since the pandemic, at least, all the good (or bad) stuff gets released on Fridays after 5 PM.