California Middle Class Tax Refund question

[darrendage]

Forgive me if this has been answered already.  I did a search and I couldn't find the answer.  My question is this.  

Is the California Middle Class Tax Refund like a tax refund advance?  In other words, if after filing my 2022 California tax returns and assuming I would get a refund, will my refund be slightly smaller because of the California Middle Class Tax Refund?  I typically owe a little bit each year.  Will this increase my California tax liability?  Thanks in advance for any answers you can provide.

[Bsch4477]

While the IRS hasn’t yet been clear about this, it is most likely that this payment will be taxed by the IRS. It is not taxed by California. Keep posted. 

[RobertB4444]

As @Bsch4477 says above the IRS may decide to tax the Middle Class Tax Refund as income for federal purposes.  They haven't said yet and if you received more than $600 from the refund then you should receive a 1099-MISC from California for the payment.

However, there is no need to enter the payment on your California tax return.  The payment you received is not related to your California taxes for 2022.  It is also not income in California.  So it will not effect your 2022 California return in any way.

@darrendage

[Bsch4477]

Still unknown (at least to me) is how TurboTax will correct the payment which will be reported on the federal return so that it’s subtracted from income on the California return. 

[Polkadot1 · Accepted solution]

Set TurboTax to "forms mode" and go to Schedule CA.  Lines 28 and 29 is where you deal with the Middle Class Tax Refund.  You offset the amount you received (shown on Line 29 if you entered the 1099-MISC from the Franchise Tax Board) by entering that same amount (as a positive number) in Column B of Line 28.  It is that simple.

But please note, TurboTax does not handle the offset for you automatically.  You have to take these steps manually in Forms Mode.  This will reverse it out of your CA taxable income, but you will still pay federal tax on the money.

[darrendage]

Thanks for the reply. Since I usually owe a little bit at tax time, I thought it would be best to go with my instincts and just hang onto it to help pay the taxes.

[CA_Tax_Payer]

I got a 1099-MISC for this 'refund' today.  For the TTH&B question about Type of Payment I picked "Taxable grant" because it clearly is not any of the other options.  On the next screen do I enter the amount from line 3 of the 1099 (labeled "Other Income") into the "Box 6 Taxable Grants" box in TTH&B?   (Box 6 on the 1099 is labeled "Medical and health care payments".  There is nothing about "Grants" on the 1099-MISC I received.)

[Bsch4477]

To report on Federal >Income >choose what I want to work on >Other common income >1099-misc>other income. Report the Middle Class Refund and follow the prompts. 

On California section you will see HERE’s INCOME THAT CALIFORNIA HANDLES DIFFERENTLY. Scroll down to Miscellaneous and scroll down to MIDDLE CLASS TAX REFUND and follow the prompts to exclude the income from CA. 

[Polkadot1]

It goes in Box 3, just like on your 1099  (Not Box 6).   Examples given of Box 3 "other income" include cash (which you essentially received) or a check from the Alaska Permanent Fund. 

If you are using TT in interview mode, when asked by TT to describe the reason, just put "California Middle Class Tax Refund."  And then on the next screen, "None of these apply" for uncommon situations.  On the following screens, choose:

-- its not related to your main job

-- you got it in 2022

-- it didn't involve an intent to earn money

This will place the income on line 8z of Schedule 1, and transfer it to Line 8 of the 1040 (Other income).  You can then adjust it off for the California return on Schedule CA under "Subtractions".  That way it isn't taxable for the State, just Federal.

Note that the IRS hasn't made an tax exception for any funds that States have distributed in this manner.  People who got less than $600 did not receive a 1099 from the Franchise Tax Board, so technically they also owe tax, but they can probably get away with not reporting it.

[CA_Tax_Payer]

If there were a Box 3 on the 1099-MISC entry on TTH&B (after choosing the only Type that makes sense) I would not have asked my question above.  The only boxes are 2 (Business or Farm), 5 Reemployment...), 6 (Taxable Grants), 7 (Ag Payments) and 9 (Market Gain...).  I'd provide a screen shot if I could find a way to do that.  So box 6 on the TT input form from box 3 on the 1099-MISC seems to be the only thing that makes sense.  

[Bsch4477]

I am using home and business also. Are you sure you are not looking at 1099-G?

When  I choose what I want to work on and go to Other common income >Income from form 1099-misc I get a window that has boxes for rent, royalties and in box 3, Other income. 

[CA_Tax_Payer]

Thanks, Bsch4477.  You are correct.  My mistake: because it came from the government, I inadvertently went into the 1099-G area instead of 1099-MISC.  Now that I have fixed that problem, there are (at least) two more: (1) it asks if it is for me OR my wife and it was issued to BOTH of us.  I don't see how that matters because it's a joint return, but I'll just say it's mine because my name is first on the 1099.  (2) After all that it asks if I own a farm and it happens that I do own a farm in Indiana and that too doesn't seem relevant.  Any advice on this question?  Thank you!

[Bsch4477]

It’s fine to report it for you and to ignore the farm question. 

[CA_Tax_Payer]

Thanks!  I don't like to lie about owning an out-of-state farm but if I say yes TT threatens to open a schedule F even though I already entered all that data on Form 4835!  I own the property but I don't do the farming.  I share the costs and income with the person who is the actual farmer.  I don't 'materially participate' in the actual planting and harvesting.  Thanks again for your helpful guidance.

[GeorgeM777]

To follow-up on the previous posts, it appears you are a landlord receiving cash rent, and therefore, should file Schedule E to report the rental income.  Your income does not appear to be from a farming operation, but from a rental.  Reporting the rental income on Schedule E also does not trigger the application of self-employment tax.  If your participation should change to material participation, then such change would require a different reporting obligation.

@CA_Tax_Payer