California recently issued a "Middle Class Tax Rebate".
CA FTB says it will issue 1099-Misc and that it *MAY* be federally taxable.
https://www.ftb.ca.gov/about-ftb/newsroom/middle-class-tax-refund/help.html
Thoughts ?
Note that this rebate is not a *refund* of a personal overpayment.
Nor it is proportional to the state tax paid - in fact, because the
rebate amount phases out at higher incomes, it is *inversely*
proportional to the state tax paid.
-- Shankar Prasad
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You can find the text of the law that created the MCTR at:
https://legiscan.com/CA/text/AB192/2021
What it says is that the payment is not a gift; it is not a refund of state income taxes; it is not compensation; it is not taxable by the California. It is financial relief for Californians adversely impacted by economic disruptions. The economic
disruptions are listed as the increased costs for goods, including gas, due to inflation, supply chain disruptions, the effects of the COVID-19 emergency, and other economic pressures.
So, why would the CA FTB decide to issue 1099-MISC information forms identifying the payments as taxable Other Income? I can only think of two reasons. 1. They asked the IRS and the IRS said the payments do not fall under the GWE (General Welfare
Exclusion) or any other code section. 2. They did not ask the IRS and concluded by themselves that it does not meet the GWE or any other code section.
The GWE is an IRS doctrine that says payments made under a legislatively provided social benefit program for promotion of the general welfare that is based on family or individual need are excludable from gross income. The GWE is generally used when
their are public assistance or relief programs. I believe the conclusion to issue the 1099s was made because this legislation that does promote the general welfare fails the part about family or individual need.
First, the payments are going to Californians with a CA AGI of up to $500,000. That means federal gross income in excess of $500,000. Second, the Californians in dire need of this were excluded from the payments. These are the people whose incomes were
low enough so that having to file a 2020 tax return was not necessary. If they didn't, they got zip as it was too late to meet that 10/15/21 deadline.
Look at the last series of relief (stimulus) payments from CA that were not taxable: The GSS and GSS II. The GSS required eligibility for the CA Earned Income Tax Credit or if an ITIN filer, income no higher than $75K. GSS II capped income at $75K. They
were announced when there was still time to file a 2020 tax return before 10/15/21.
Lastly, it cost the state a lot of money to send 1099-MISC forms to the feds and taxpayers. I don't think they would be issuing them without being convinced that the payments fail the GWE test or some other section of the Internal Revenue Code that
excludes income..
All that being said, there may be another way to exclude the income. The CA Constitution sets appropriations limits for money coming from the General Fund. Certain payments are excluded from this appropriations limit. Here is what another section of the
bill says:
SEC. 9. The Legislature finds and declares that proceeds of taxes included in the calculation of the state appropriations limit under Article XIII B of the California Constitution includes, but is not limited to, certain motor vehicle fuel and diesel
fuel taxes, personal income taxes, sales and use taxes, bank and corporation taxes, insurance taxes, alcohol taxes, and certain cigarette taxes. It is the intent of the Legislature that the refunds provided for in this act constitute a refund of these
taxes, excluded from appropriations subject to limitation, as defined in subdivision (a) of Section 8 of Article XIII B of the California Constitution.
The CA Legislative Counsel Digest says this about Sec. 9.
(7) The California Constitution generally prohibits the total annual appropriations subject to limitation of the state and each local government from exceeding the appropriations limit of the entity of government for the prior fiscal year, adjusted for
the change in the cost of living and the change in population, and prescribes procedures for making adjustments to the appropriations limit. The California Constitution excludes certain specified appropriations as exempt from this total annual limit,
including tax refunds.
This bill would provide that the appropriations made by the bill are appropriations for purposes of refunding state tax liability incurred by Californians during the 2021–22 fiscal year, are not subject to the annual appropriations limit set by the
California Constitution. The bill would make related findings and declarations.
So, it appears that the expenditures by the state for this refund are refunds of certain excise taxes and sales and use taxes. (Another section of the bill states that is not a refund of personal income taxes.) One might conclude that as long as one did
not receive any tax benefit by deducting those taxes on the federal return, that the payment is nothing more than a nontaxable rebate or to put another way, a reduction in the price of goods and services purchased.
All of the preceding should not be construed as tax advice.
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