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Home FAQ on Tax Issues

Great News : Middle Class Tax Refund Not Taxable

by Prashant Thakur
February 11, 2023
in FAQ on Tax Issues
0

The Middle Class tax refund (MCTR) by the state of California is tax-free as per the announcement made by IRS on Feb. 10, 2023, vide R-2023-23. Similar to middle class tax refund by California, IRS also announced exemption for other 21 states. With this, the ongoing debate and controversy are set to rest on the taxability of various state payments to its residents.

Is middle class tax refund taxable?

Basically, under the Internal Revenue Code, the Federal tax law, all income is taxable unless it is explicitly declared exempt. From that point, the receipt of middle class tax refund received from California state is principally taxable, even though it is made exempt from state tax. Therefore, tax professionals were arguing whether the amount would be tax exempt or taxable.

The argument in favor of the conclusion that MCTR payments were not taxable was section 61 of the IRC, which provides that a receipt may be excluded from income if the following three criteria are satisfied,

  • Payment to a taxpayer is made from a government fund
  • Payment is made for the promotion of general welfare
  • it does not represent compensation for services

However, some tax professionals believed that unless IRS brings out some notification declaring the Middle Class Tax Refund by California as exempt from tax, it should be included in the taxable income for Federal tax purposes.

IRS declaration on Middle Class Tax Refund & other state payments

IRS has given reasoning for exempting payments by 22 states, that includes the state of California:

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex fact intensive inquiry that depends on a number of considerations.

……………….

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

  • Alaska [1]
  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Idaho
  • Illinois [2]
  • Indiana
  • Maine
  • New Jersey
  • New Mexico
  • New York2
  • Oregon
  • Pennsylvania
  • Rhode Island

List of payments by state in 2022 that are tax exempt as per IRS

StateState payment program and link to state website
AlaskaEnergy Relief Payment (supplementing the Permanent Fund Dividend)
CaliforniaMiddle Class Tax Refund
ColoradoColorado Cash Back
ConnecticutChild Tax Rebate
DelawareRelief Rebate Program
FloridaPandemic Temporary Assistance to Needy Families
HawaiiAct 115 Refund
Idaho2022 Tax Rebate
IllinoisIndividual Income Tax Rebate
IndianaAutomatic Taxpayer Refund #1Automatic Taxpayer Refund #2
MainePandemic Relief Payments
New JerseyITIN Holders Director Assistance Program
New MexicoMultiple rebate and relief programs
New YorkSupplemental Child Credit and Supplemental Earned Income Tax Credit
OregonOne-Time Assistance Payments
PennsylvaniaOne-Time Bonus Rebates
Rhode Island2022 Child Tax Rebates

Above table is made from IRS chart.

Post Disclaimer

While the information on this site  - Internal Revenue Code Simplified-is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.

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