IRS says guidance on whether Middle Class Tax Refund is taxable could come next week
The IRS said on Friday that guidance clarifying whether California’s Middle Class Tax Refund payments should be considered income for federal tax purposes could come next week.
As of last month, California’s Franchise Tax Board (FTB) has issued more than $9 billion in payments that have benefitted more than 31 million California taxpayers and their dependents.
U.S. Rep. Kevin Kiley, R-Rocklin, this week had called for the IRS to clarify whether the payments were taxable.
“As federal tax deadlines loom, numerous constituents have contacted my office urgently asking for help getting information from your agency regarding whether payments under California’s Middle Class Tax Refund (MCTR) are considered income for federal tax purposes,” Kiley wrote in a letter to IRS Commissioner Doug O’Donnell on Thursday.
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."
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How we got here
California's FTB has said that the payments are not considered taxable for California state returns. But it has said the payments may be considered federal income and that those who receive payments of $600 or more will receive a 1099-MISC form for the payments.
The FTB also advised that people consult with a tax professional, but there appear to be mixed views on whether it should be considered taxable.
A representative for H&R Block told KCRA 3 in a statement that the company was able to help customers report the payments and that "without clear IRS guidance currently, there is a reasonable basis to claim the payments are not taxable at the federal level."
H&R Block recommended reporting the income on your federal return "and clearly indicate the payment is for the California Middle Class Tax Refund."
"Clearly reporting the payment should help make it clear to the IRS how the taxpayer is treating the payment and prevent possible IRS notices," Shayla Wilkinson with H&R Bock said.
A TurboTax spokesperson also told the San Francisco Chronicle that its understanding was that the payments were not taxable.
KCRA 3 had reached out several times to the IRS for comment over the past two weeks about whether those payments are, in fact, taxable or exempt.
A representative had said on Wednesday that the IRS was “aware of the issue and looking to put out guidance” that people can rely on. About 20 states have issued payments, and not every case is the same, the rep said.
KCRA 3 Investigates’ Brittany Johnson has also asked about another issue some viewers have raised. In some cases, people received 1099 forms despite not having received their Middle Class Tax Refund. Other people have still received a 1099 form even though they reported fraud with their payment.
“People have been left wondering how they should report (so-far) non-existent income,” Kiley wrote in his letter.
He added that for those who received a 1099 but not a payment, “Should they exclude the payment from their 2022 return and wait to file any income they receive in 2023 – if the State payment is in fact taxable?”
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