IRS says it will not tax California's Middle Class Tax Refund

Agency using welfare and disaster provision to skip taxation on one-time relief payments

Tax filers, your Middle Class Tax Refund is safe from Uncle Sam.

Two weeks after California began sending incomereporting 1099 forms to recipients, the IRS on Friday said it would not tax the inflation relief payment.

“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,” the IRS said in a statement.

California was among 18 states that issued some type of refund to taxpayers in 2022. For those who received an MCTR of $600 or more, a 1099-MISC was issued by the Franchise Tax Board.

That form and its tax implications set off a whirlwind of questions about whether or not the federal government would claim a big bite of disaster relief payments, which amount to $9 billion in California.

The IRS said that after a review, it determined it “would not challenge the taxability of payments related to general welfare and disaster relief.”

The other states with relief payments that were exempted from taxation include Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island.

Because of storms across the state, most California taxpayers got an extension from the IRS to file their federal returns by May 15, instead of mid-April. This extension applies to 2022 individual income tax returns due April 18, as well as 2022 business returns typically due March 15 and April 18. The list of eligible counties is available on the IRS' disaster relief page.

The inflation refunds were approved by state legislators in summer 2022 to help offset rising inflation.

Payments range from $200 to $1,050 and go to taxpayers only. Single filers with no dependents who earn less than $250,000 annually will get $350. Joint filers get $700. Add qualifying dependents and the refund jumps by $350. Those who earn more than $250,000 but less than $500,000 are getting the lowest refunds.

Social Security and welfare recipients who do not file taxes were not eligible for the MCTR.

The IRS on Friday offered a rare thank you to taxpayers, tax professionals, software companies and state tax administrators for their patience as the IRS and U.S. Treasury Department “worked to resolve this unique and complex situation.”

California reported Jan. 13 that it had approved $9 billion worth of payments for 16.6 million recipients. Money Network, which won a $25 million contract with California, is in charge of distributing debit cards to recipients. Direct deposit MCTR payments, issued to electronic tax filers who got a refund in 2021, were handled by the FTB.

The tax board said it will offer a new update Feb. 22 on the MCTR distribution.