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MCTR-MIDDLE CLASS TAX REFUND TAXABLE ON FEDERAL AND TAX FREE ON STATE

Forum|Forum|3 years ago
January 19, 2023
11 replies
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Hi, so according to the ftb website anyone who received more than $600 of middle class tax refund will receive a 1099-misc. so is anyone being proactive and adding the mctr as other income and then excluding it per notice 2003-18 "GENERAL WELFARE EXCLUSION" I learned we can do this while attending a awesome tax brass class. page 39 of the tax brass book. let me know your thoughts or if you forgot to add and exclude or if anyone has recd the actual 1099 forms. brass tax class explained that these mctr shouldn't be taxed by federal since its a governmental fund, are for promotion of general welfare example generally based on individual or family needs) and not compensation for service.

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Best answer by jerry

"Yes, but I just tried it in Lacerte."

That doesn't matter. Neither does trying it with TurboTax. You seem to be thinking your software is ready to go.

Until the IRS declares how it is to be treated, it doesn't matter which program you enter it into or how you enter it there or how anything is handled.

IRS just announced in IR-2023-23 that the MCTR is not federally taxable:

"The IRS has determined that in the interest of sound tax administration and other factors, taxpayers in many states will not need to report these payments on their 2022 tax returns.
During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information."

abctax55

Level 15

Spidell disagrees with that position. AFAIK, there's no official IRS position, yet.

As I don't start returns until Feb 1, I don't have an official position yet either.

HumanKind... Be Both

BobKamman

Level 15

That 2003 IRS notice is certainly an odd way to answer the question. It’s an explanation of why payments to local businesses affected by 9/11 are taxed. Its only relevance is the paragraph (out of 10 pages) that distinguishes payments to individuals. So, let’s take a look at that:

“The Internal Revenue Service has consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not includible in a recipient’s gross income (“general welfare exclusion”). See, e.g., Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 840. To qualify under the general welfare exclusion, payments must: (i) be made from a governmental fund, (ii) be for the promotion of general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Rev. Rul. 75-246, 1975-1 C.B. 24; Rev. Rul. 82-106, 1982-1 C.B. 16. Payments to businesses generally do not qualify for the exclusion because they are not based on individual or family needs . . .[with citations].”

As I understand it, California will not express an opinion on whether these payments are income on the 1040; their opinion is only that to stay out of trouble with IRS, they are issuing 1099's with them. “The United States government has a tax on income, not on pieces of paper.” [Kamman] . Will IRS rule on this issue by next week, before the tsunami of returns? I doubt it. I prepare a few California returns, but not until March or April. So I have time to think about it. For now, my opinion is that the payments are not taxable.

Having said that, what are the states doing, that are distributing a budget surplus by sending out “rebates” of income tax collected, based roughly on how much each person paid? For example, Idaho and South Carolina. Are they reporting these to IRS as refunds? Should they? The California payments were based not on tax paid, but on AGI. Several other states did the same.

P

PamC

Level 6

Here in Oregon, when revenues exceed those budget for the two year budget, there is a refundable state tax credit. This isn't taxable on the federal return, but it invariably affects some folks' SALT deduction. And of course I have to have the "focus on the donut, not the hole" discussion.

That being said, a credit is different than a rebate. But it does seem to fit the "general welfare exclusion" definition. I would rather that my client get the exclusion and have to later pay the small amount of tax than have to amend to get the pittance. However it's going to be a discussion and a decision the client is involved in.

qbteachmt

Level 15

This reminds me of the discussion for 1099-Misc vs 1099-G for the amounts paid, such as to cover utility costs. This is the Fed link for that source of funds:

https://www.irs.gov/newsroom/frequently-asked-questions-for-states-and-local-governments-on-taxability-and-reporting-of-payments-from-coronavirus-state-and-local-fiscal-recovery-funds

G = issued by governmental entity (paid out for governmental purposes and no services provided).

Don't yell at us; we're volunteers

rbynaker

Level 13

I'm also sitting on the fence on this. I don't have many CA clients and the ones I do have are slackers (2021 returns were filed in October last year). If we don't have an official IRS position by then I'll go with the prevailing winds. Smells like "general welfare" to me.

VA did a tax rebate last year. IMO that IS taxable to the extent of tax benefit received in a prior year. The rebate required that you paid tax in the prior year and it was limited to the amount of tax paid. Don't know about other states but I suspect the devil's in the details...

Rick

Just-Lisa-Now-

Intuit Community Champion

The amount really isnt very high, and only lower income people got it, the federal tax burden will be minimal, I doubt we'll see much work on this trying to get the feds to not tax it.

Sure isn't what they made it out to be in the beginning, so we got taxed on our huge gas prices at the pumps, now we get taxed on the "gas rebate" too.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

George4Tacks

Level 15

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=27184

Answers are easy. Questions are hard!

BobKamman

Level 15

The best way to get a fast answer from IRS on an issue like this is to ask a Member of Congress to ask IRS about it. I'm surprised that no constituent in Kevin McCarthy's or Nancy Pelosi's district has contacted them about it. Even better, ask a Member with some influence in the House these days.

T

TAXMANPAT

Level 3

It is California, New York an a handful of other urban centers role to pay the morally superior welfare states bills! This puts McCarthy in a pickle. Look at SALT. If congress has a say, it'll be taxable. If that's the case maybe middle america can send a thank you note.

Skylane

Intuit Community Champion

I didn’t mean to start a political debate. Just my poor humor and the tongue-in-cheek remark. IMO Cali and New York have the most complicated tax codes in the nation.

If at first you don’t succeed…..find a workaround

1

10409000Author

Level 4

Today 01/19/22 a client just sent me a screenshot of the 1099-misc they received from the ftb showing $700. i added it to their taxes and it came out to about $84 federal tax..and another client was $232 of taxes.. (it reduced her eic) I also called the ftb and they confirmed yes they have mailed out and still sending 1099-misc forms to people.. this is a pain in the butt! cause we will also have to remember to include 1099-misc for 2023 since some people are getting their mctr payments jan 2023 this month. so much extra works.

BobKamman

Level 15

There are those who, when IRS says "Jump," ask "How High?"

And then those who, when FTB says "Maybe Jump," answer "That 1099 You Sent Really Worried Me."

MCTR is like cancer. Sometimes the best treatment is "watchful waiting."

K

Kobebean

Level 3

Hi,

I have CA clients getting these 1099's. How do you exclude it from to general welfare?

Just-Lisa-Now-

Intuit Community Champion

Youd make an adjusting entry on the Other Income line citing the IRC you're claiming it falls under.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

K

Kobebean

Level 3

Thanks

abctax55

Level 15

Dave Fogel is one of THE smartest tax preparers around, and know CA inside/out:

https://img1.wsimg.com/blobby/go/310b78c2-6a3e-4922-acb3-709b44966191/downloads/CSEA-Fogel-MiddleCla...

His article gives a lot of substantiation to exclude the MCTR from taxable income for Federal purposes.

YMMV & consider disclosures.

HumanKind... Be Both

BobKamman

Level 15

“Hopefully, the IRS will issue guidance in the future that reaches the same conclusion.”

From Wikipedia: Hopefully is an adverb which means "in a hopeful manner" or, when used as a disjunct, "it is hoped". Its use as a disjunct has prompted controversy among advocates of linguistic purism or linguistic prescription. Merriam-Webster says the disjunct sense of hopefully dates to the early 18th century and had been in fairly widespread use since at least the 1930s. Objection to this sense of the word only became widespread in the 1960s. Merriam-Webster says that this usage is "entirely standard". Before 2012, the AP Stylebook proscribed the use of "hopefully" as a disjunct.

So, I won’t complain about hopefully. We don’t yet have an IRS commissioner, so the mental image of him looking hopeful while making an announcement is difficult to conjure.

However, when else would IRS issue guidance, if not “in the future” ? I assume the author is not being paid by the word. Maybe I shouldn’t. In any case, I will defend my position that exclusions should not be added in to income on a return only to be subtracted out. Practitioners aren’t going to charge for this? Their clients are being bamboozled.

BobKamman

Level 15

Lighting a candle.

Not cursing the darkness.

https://procedurallytaxing.com/an-open-letter-to-the-last-irs-commissioner/

sjrcpa

Level 15

@BobKamman Nice candle.

I saw Chuck on Tax Analysts Taxing Issues yesterday. He looked sunburned. He is very proud of the IRS employees and that he got forms and instructions into Spanish. (He said the same things the last time I heard him speak a few months ago). Other than that he seemed clueless.

The more I know the more I don’t know.

BobKamman

Level 15

Maybe this letter will help, too.

https://d12t4t5x3vyizu.cloudfront.net/kiley.house.gov/uploads/2023/02/IRS-Cmssner-CA-Middle-Tax-Refund-2-2-23.pdf

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