To ease the pain of high gas prices, eligible Californians will start receiving tax refunds ranging from $200 to $1,050 starting Friday under a budget deal approved by the Legislature and signed by Gov. Gavin Newsom in June.
Which caused many people to ask: Do I have to pay taxes for this? Because nothing spoils a windfall in October like a higher tax bill in April.
As is so often the case with tax questions, the answer is: It’s complicated.
The stated purpose of the $9 billion middle-class tax refund is to offset high gasoline prices, although money under the agreement goes to people who meet the income limits, regardless of whether they drive a gas-powered car . To qualify, you must have lived in California for at least six months in 2020, filed a state tax return that year, and be a California resident on the date the refund is paid.
Despite what the state calls them, the payments are not actually refunds. They are fixed amounts based on your income in 2020, regardless of how much you paid in taxes.
In fact, it’s possible that your “refund” could be larger than your 2020 tax bill. Singles with less than $75,000 in 2020 income and at least one dependent will get $700 (or $350 with no dependents), and single-income couples less than $150,000 in 2020 and at least one dependent will receive $1,070 (or $700 without dependents). Heads of household with 2020 income less than $150,000 and at least one dependent will receive $700 (or $350 without dependents).
The state franchise tax authority says the payments will be made like ordinary tax refunds Not subject to California income tax—the legislature has specifically excluded them from the state definition of taxable income. However, to emphasize the unusual nature of the payments, the Board will not send recipients the federal tax form (1099-G) that the state would issue if it were a tax refund.
This is where the federal tax picture gets complicated. If this were a refund of paid state taxes, anyone who had claimed the standard deduction on their federal taxes would do so Not must report income on their 1040s next year. And the vast majority of taxpayers, particularly those at the lower to middle levels of the income ladder, take the standard deduction. Only taxpayers who list their deductions and subtract their state income taxes from their federal returns are required to report the state refund as income to the IRS.
However, since this is a rebate rather than a refund, there is no clear guidance from the IRS on how it will handle the money. And according to IRS Publication 525, income is generally taxable unless specifically exempted by federal law.
HD Palmer, a spokesman for the state Treasury Department, said it was uncertain at this time how federal agencies would handle the payments. The advice of the state: ask your tax advisor.
When a state makes non-means-tested benefit payments to residents, those payments are taxable at the federal level. But a better analogy is that these “refunds” are like the stimulus payments the state paid in 2021 — actually gifts. And according to publication 525, gifts are not usually reported as income.
The IRS also has a “general welfare exclusion” that applies to government payments made to promote the well-being of the community when they are based on need — for example, to help communities recover from a flood or earthquake. The current payments may well fit into that category because they are designed to alleviate the pain that high gas prices have inflicted on state residents and the economy.
With either approach, nobody receiving a mid-range tax refund would have to pay taxes on it.
The Times has asked the IRS for an official interpretation of the tax law regarding the refund, and we’ll update this article when we have it. For now, we’ll stick with an IRS spokesman’s best guess, which is that the middle-class tax refund is a gift not subject to federal taxes.
The 2020 income limits for the state tax refund—$250,000 in adjusted gross income for a single claimant, $500,000 for a couple or head of household—are high enough to cover about 90% of state taxpayers. And that could explain why the state expects it will take more than three months to make all payments.
According to the Franchise Tax Board, the first people in line for the refund will be Californians who received last year’s stimulus payments via direct deposit. These payments are expected to continue through October 25. Then, from Oct. 28 to Nov. 14, payments will be made to taxpayers who didn’t qualify for the state’s stimulus payments, which were only available to households with incomes of $75,000 or less.
The state hasn’t announced when it plans to send prepaid card payments to eligible filers who haven’t signed up for direct deposit. After Oct. 17, the board said it will announce a timeline for sending cards to households that have received stimulus payments. After November 7, dates will be announced for claimants who have not received stimulus payments and whose last names begin with A through L. And after November 21st, dates will be announced for the remaining eligible applicants. All but 5% of direct deposits and cards should run out by the end of the year, the board says.
About the Times Utility Journalism Team
This article is from the Times’ Utility Journalism team. Our mission is to be essential to the lives of people in Southern California by publishing information that solves problems, answers questions, and aids in decision making. We serve audiences in and around Los Angeles—including current Times subscribers and diverse communities whose needs have not been met by our coverage in the past.
How can we be useful to you and your community? Email Utility (at) latimes.com or one of our journalists: Matt Ballinger, Jon Healey, Ada Tseng, Jessica Roy and Karen Garcia.
https://www.latimes.com/california/story/2022-10-07/california-gas-rebate-federal-tax-liability Will you have to pay taxes on California’s gas rebate?