It depends and it's possible. Since this is a tax refund from California (CA), it would seem the income was already taxed on your federal return when you earned the income. However, if you deducted the CA tax on your federal return, as an itemized deduction or as a business expense, then it could be considered taxable income when refunded, if necessary, under the Tax Benefit Rule.
- Tax benefit rule. IRS Publication 525 You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.
1099-MISC income tax information (CA Update 2022) Individuals who received a California Middle Class Tax Refund (MCTR) of $600 or more will receive a 1099-MISC for this payment.
@ph451
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