IRS Will Tax Arizona Family Tax Rebates: What You Can Do

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If you received an Arizona family tax rebate last year, you will have to report that amount on your federal income tax return. The IRS has classified the rebate payments as taxable income, meaning some Arizona families might have to pay tax on the money they received.

The Arizona Department of Revenue recently confirmed this news about the Arizona Families Tax Rebate. However, the tax status of the payments could surprise the hundreds of thousands of families who believed the assistance was tax-free.

Arizona sues the IRS

Meanwhile, last month, Arizona Attorney General Kris Mayes filed a lawsuit against the IRS to prevent the agency from taxing the Arizona tax rebates. In the complaint filed in federal district court, Mayes argues that the IRS’ treatment of the rebates as taxable violates the law and is inconsistent with how the agency treated similar rebates in other states.

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"This lawsuit is about standing up for Arizona taxpayers," Attorney General Mayes said in a release. "The federal government's decision to tax these rebates is unfair and unlawful – and I will do everything I can to ensure the tax relief provided to Arizonans by their state government remains in the pockets of Arizona taxpayers, as intended."

Then, on March 13, Congressional lawmakers including House Ways and Means Committee member Rep. David Schweikert (R-Ariz.) and Reps. Juan Ciscomani, (R-Ariz.) and Rep. Greg Stanton (D-Ariz.), sent a letter to IRS Commissioner Danny Werful. That letter urged the IRS to "reconsider its determination and provide expedited relief to compliant Arizona taxpayers who have already filed their 2023 tax returns."

Here’s what else you need to know.

IRS says Arizona family rebate is taxable

As Kiplinger reported, Arizona faced a significant budget surplus of over $2 billion. During state budget negotiations, lawmakers allocated approximately $260 million to create the Arizona Families Tax Rebate. Arizona Gov. Katie Hobbs approved the state's $17.8 billion budget last summer.

Qualifying taxpayers received the child tax rebate for up to three dependents. So, in some cases, families with multiple dependents received up to $750.
The state distributed most of the rebates by Nov. 15 of last year.

The one-time child tax rebates were supposed to provide relief to Arizonans dealing with the challenges of high inflation. According to state estimates, around 740,000 Arizona taxpayers were eligible to receive the payments.

The IRS announcement about the payments being taxable income has raised concern. As mentioned, Arizona's Attorney General filed a lawsuit against the IRS to prevent the agency from taxing the rebates. At the same time, Arizona lawmakers are facing an estimated $400 million state budget shortfall for the current fiscal year.

What to do?

If you received an Arizona child tax rebate last year, state officials say you will need a 1099-MISC form. The 1099 is used to report income to the IRS. Usually, a 1099 form is sent automatically. However, officials have said that Arizonans should retrieve their 1099-MISCs from the Arizona Department of Revenue website.

The 1099-MISC forms will be available at www.AZTaxes.gov.
Once you have the 1099, you’ll want to verify that the information is correct before filing your 2023 federal income tax return.
The IRS began accepting tax returns on Jan. 29.

This situation serves as a reminder to stay informed of federal and state tax changes. For example, the U.S. Congress is considering potential changes to the federal child tax credit that could help an estimated 15 million children and their families.

If you have concerns about how the Arizona Families Tax Rebate may affect your taxes, consult a tax professional or contact the State Department of Revenue for additional information.

Does Arizona have a state income tax?

Arizona has a flat state income tax rate of 2.5%. Arizona lawmakers passed legislation last year that cut the state’s income tax rate to the new flat rate, down from 2.98%. Arizona’s lower flat personal income tax rate initially wasn’t expected until 2024.

However, the lower rate became effective early due to higher-than-expected tax revenues. Now, state lawmakers are facing estimated revenue shortfalls as they craft a new budget.

Editor's note: This article has been updated to include information about Arizona lawmakers urging the IRS to reconsider its determination.

Kelley R. Taylor is the senior tax editor at Kiplinger.com, where she breaks down federal and state tax rules and news to help readers navigate their finances with confidence. A corporate attorney and business journalist with more than 20 years of experience, Kelley has helped taxpayers make sense of shifting U.S. tax law and policy from the Affordable Care Act (ACA) and the Tax Cuts and Jobs Act (TCJA), to SECURE 2.0, the Inflation Reduction Act, and most recently, the 2025 “Big, Beautiful Bill.” She has covered issues ranging from partnerships, carried interest, compensation and benefits, and tax‑exempt organizations to RMDs, capital gains taxes, and energy tax credits. Her award‑winning work has been featured in numerous national and specialty publications.