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.
