Call Kurtis: Do you have to pay federal taxes on your gas tax rebate?
Update: After more than a week of no response, an IRS spokesperson is now acknowledging it's working on an answer to the question. The agency could not say when to expect it.
A San Joaquin County viewer was surprised to get a 1099-MISC for his Middle Class Tax Refund of $700. When Brian Johnson of Morada entered the info into the tax program he was using to file his taxes, it showed he owed the IRS more money. California says it would not tax the money.
"It resulted in an additional $156 that I owe to the federal government!!!" he wrote. "While my wife and I can comfortably afford this, I wonder how…the millions of other CA taxpayers receiving this gas refund are going to feel when they find out that they have to pay some of it back to our federal government. This is total BS and needs to be examined by Gavin Newsom and our state legislators to get this corrected."
It is true California is not taxing this income, but what about the feds?
We reached out to the Franchise Tax Board (FTB), the California Department of Finance, the IRS, a tax attorney and a CPA. We only heard back from the Franchise Tax Board and the tax attorney and got differing answers. The FTB said it may be considered federal income. The tax attorney thinks the payments are exempt under the IRS Code.As we await word from the IRS, here are the full responses we did receive.
Franchise Tax Board:
As we note on our MCTR Help webpage, the MCTR payments received by Californians may be considered federal income. FTB is required to issue a 1099-MISC form for payments of $600 or more for the taxable year in which the MCTR payment was made. All taxpayers, regardless of the amount of MCTR payment received, should be aware of this as they file their federal tax return. As you mentioned, the MCTR payment is not taxable for California state income tax purposes. Taxpayers or their tax preparers can refer to IRS Publication 525 (2022), Taxable and Nontaxable Income, to determine when the MCTR payment could be subject to federal tax in their situation. Eligible taxpayers can also visit FTB's "Get free tax help" webpage to locate a Volunteer Income Tax Assistance (VITA) site near them to assist with this determination. Also, California does not have the authority to modify federal law.
Sacramento Tax Attorney Betty Williams
The short answer is, I do not believe it is taxable for federal purposes.
The longer answer is that the starting point is that "all income is subject to tax, regardless of source…" …unless there is an exception.
This was a California refund, exempt from income in California. Newsom can't do anything about what the IRS does.
The IRS has not yet said whether this refund (also known as the Middle Class Tax Refund, or "MCTF") will be taxable, however I do not believe it is taxable because of two exceptions.
One local CPA (David Fogel) wrote an article suggesting that under Internal Revenue Code (IRC) section 61(a), the General Welfare Exclusion may apply to exclude the payment from taxable income because the three criteria are met (made from a government fund, for the promotion of general welfare (this would include family needs such as housing, education and sustenance expenses, and it does not represent compensation for services).
Another exclusion available is IRC 139 for a "qualified disaster relief payment." Although on its face, the refund for the high prices of gas doesn't sound like disaster relief, in Section 10 of Assembly Bill 192, and the Senate and Assembly legislative analysis, the purpose of the MCTR is stated to provide financial relief for economic disruptions resulting from the COVID-19 emergency. In March 2020, President Trump declared the pandemic a federal disaster. See Notice 2020-18.
So, it appears reasonable that these refunds are not taxable.
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