After you file

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.

If you decide you received no tax benefit then you do not need to enter the income.  Keep the document with your tax file should you need it later.  The following shows how to remove it from CA if you do enter it for federal purposes.

Taxable income

The MCTR payment is not taxable for California state income tax purposes. You do not need to claim the payment as income on your California income tax return.  The MCTR payments may be considered federal income.

If you determine it is not taxable on your federal return, then keep the document but remove or delete it from your federal return. If it is taxable on your federal return, the when you get to the CA return you can subtract it out using the steps below.

1. Complete your CA return until you reach the screen 'Here's the income that CA handles differently'
2. Scroll until you see Miscellaneous > continue scrolling to 'Other Adjustments to Income' > Start or Revisit
3. Enter your description (MCTR) and enter the amount under the 'Subtraction' column
4. Continue to complete your CA return

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