Is California inflation relief taxed? Recipients ‘in limbo’ as they wait on IRS answer

California sent out its final batch of inflation relief payments, or the Middle Class Tax Refund, earlier in January — but new confusion ensues as we enter tax season.

Will the Internal Revenue Service tax the money as income?

After publishing a call out for questions about taxes in California, The Bee received several questions about whether the relief payments are considered taxable income.

“Is the California MCTR (Middle Class Tax Refund) Federally taxable? The only information I can find so far is that it MAY be,” Gary McIntyre wrote to The Bee. “Until this question is answered, I can’t finalize my Federal return.”

McIntyre is one of more than 16 million people who received the tax refund. He told The Bee in a phone interview that he files taxes himself and the lack of clarity from the Internal Revenue Service is frustrating.

“I normally file as early as I can,” he said. “... So I’m kind of in limbo right now.”

Another reader, Yaz Siganporia, told The Bee that they haven’t gotten their refund, which totaled over $1,000, and that a representative from the California Franchise Tax Board confirmed that the debit card was approved last December.

“It has been over a month now,” Siganporia wrote to The Bee. “Why should I claim it on my federal tax refund as income, when I don’t have the money in the bank?”

The Bee attempted to contact the IRS several times over the past week through phone call and email, and received no response as of Tuesday afternoon.

A reporter also reached out to the California Franchise Tax Board and was referred back to its website, where the answer tells taxpayers to check with the IRS or a tax professional.

A California-based certified public accountant also told The Bee she was awaiting guidance from the IRS.

“IRS operates on their own time frame,” said Claudia Stanley, a CPA from Fresno, “unless they get pressure.”

Here’s what we know so far about state and federal taxes:

Is inflation relief taxed in California?

The inflation relief payment is not taxable in California, according to the Franchise Tax Board.

This means you will not need to claim it as income for your state tax return.

Should I file it for federal tax returns?

It gets tricky for federal tax returns. If you do file it and it ends up not being taxed, it can be corrected later, Stanley said.

Those who received $600 or more in relief payments will get a 1099-MISC form, as it may be considered federal income, according to the FTB. The 1099 form, according to H&R Block, is used to report other forms of income to the IRS.

But the IRS hasn’t issued an official statement or comment on whether people need to claim it as income.

Stanley, who’s been a CPA for more than 30 years, said people should wait for the IRS. She said she talked to the IRS Santa Fe liaison weeks ago but hasn’t heard back from them.

From her contact with the representative, she said that the IRS is aware of the issue and that they may outline a “Frequently Asked Questions” guidance but there’s nothing definite yet.

Whether or not you should file your taxes with the inflation payment depends on your tax situation, Stanley said. For those with lower incomes, she said, including the payment may not make a big difference or trigger additional taxes.

In the case that you must or plan on filing the payment as income, but haven’t received the money yet — like Siganporia — Stanley recommends that you follow through with filing, if the FTB confirms that it was sent out in 2022.

What if I file and the IRS says it is not necessary?

If you happen to file and the IRS announces later that the inflation payments are not taxable, there are a way a few ways out.

Stanley said you can file a superseding or amended return to update your information. A superseding return is when you submit an update within the filing period, according to the IRS, and an amended return is when its filed after the period ends.

Sometimes the IRS may issue statements mid-tax season and will automatically correct returns. But it’s too soon to tell.

When will we hear from the IRS?

The timeline is unclear.

Stanley said she’s been encouraging people to call or email their IRS customer service representatives or reach out to the Taxpayer Advocate Service. The Taxpayer Advocate Service is an independent group within the agency that helps with tax issues and ensures taxpayers are treated fairly.

“Put some pressure on IRS or on congress to pressure IRS,” she said, “and the more squeaky wheels out there, the sooner we’re going to get grease.”