IRS Confirms Tax Fate of California Middle Class Refunds

Californians received news that the IRS decided the tax fate of special state payments "stimulus checks" made to millions of people across the country during 2022. In California, those payments were called Middle Class Tax Refunds (or MCTRs). The MCTR program resulted in the state sending out more than $9 billion in surplus funds — benefiting about 31 million eligible residents — according to the California Franchise Tax Board.

Earlier this year, the IRS had asked Californians, and taxpayers in other states, to hold off filing their 2022 federal income tax returns until a decision about the special payments was made. The agency has since announced that it will not tax California Middle Class Tax Refunds.

The news comes as the IRS has also extended the tax deadline for Californians affected by storms and California has extended its 2023 state tax deadline for affected Californians as well (more on that below). And as the IRS is suggesting that some people in California who received MCTR payments might need to amend their federal income tax returns.

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California Middle Class Tax Refund

California middle class tax refunds (sometimes called California “stimulus” payments) were one-time relief payments that ranged from $200 to $1,050. The amount eligible residents received depended on adjusted gross income, filing status, and family size, as reported on 2020 California tax returns. The payments were sent by the state from October 2022 to January 2023, either through direct deposit or via debit cards. As of now, most California MCTR payments have been sent.

The California middle class tax refund payments were part of a trend last year. Many states with post-pandemic budget surpluses, issued inflation relief or “stimulus” payments, and tax refunds or rebates, to eligible residents. Because of the unique nature of the different state programs, the IRS won’t tax most of the payments made in 21 states—including California. Some taxpayers in states where payments were considered compensation, or were refunds of taxes paid, might have to report certain payments.

The IRS determination is good news for many Californians who also have a little more time this year to file their federal tax returns (additional details on that below). But the IRS announcement came a little late for the Golden State—a couple of weeks after California had already started issuing IRS 1099-MISC forms to residents. 

1099-MISC from California

IRS Form 1099-MISC is typically used to report more than $600 in income. A copy of the form is sent to both the taxpayer and the IRS. Taxpayers are expected to report amounts from the 1099-MISC on their federal income tax returns. The 1099-MISCs from California related to the MCTR program caused some confusion for Californians. That’s in part because at the time the tax reporting forms were issued, the state didn’t know whether MCTRs would be taxable at the federal level. (California had already said that middle-class relief wouldn’t be taxable on state returns.)

Now the IRS has confirmed it won’t challenge the taxability of California’s middle class tax refunds, Californians who received a 1099-MISC related to their MCTR, shouldn’t have to worry about reporting the amount on their 2022 federal tax returns. However, if you’re a California resident and received a form 1099-MISC related to income other than from the MCTR, don’t ignore that tax form. If you’re unsure, consult a professional before you file your taxes. 

IRS Extends California Tax Filing Deadline 

The news that the IRS won’t tax millions of California middle-class tax refunds comes on top of other important California tax deadline extension relief.

Federal Tax Deadline Extension: Californians who were victims of storms in designated areas of the state get an extension to file their 2022 taxes. Although for most people Tax Day 2023 is April 18 (it’s not the normal April 15 due to the weekend and a holiday), California storm victims have until October 16, 2023, to file their 2022 federal individual income tax returns and business returns.

California FTB Tax Deadline: From a state perspective, the California tax deadline is usually April 18 and money owed on a California state return is due at that time. California grants an automatic extension to file a state tax return until October 16, 2023. But California announced that it extended its state tax filing and payment due dates for Californians in affected storm areas, to October 16, 2023.

Some Californians Should Amend Their Federal Tax Returns 

UPDATE (April 2023). If you received a Middle Class Tax Refund and filed your 2022 federal income tax return early before February 10, 2023, the IRS says you should check to see if you reported your  MCTR payment as income. If you worked with a tax preparer, ask them to double-check to see if you need to file an amended return due to reporting the California MCTR as income on your federal tax return. 

That’s because some early filers may have reported the MCTR as income on their federal tax returns, and so may now have lower taxable income and may possibly be due a tax refund. If you didn’t receive a Middle Class Tax Refund last year, the IRS announcement about amending your return doesn’t apply.

For more information, see Kiplinger’s report on how some special state payment recipients may need to file an amended tax return.

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