Is the California stimulus amount taxable ? Turbotax is treating it as taxable - both state and federal.

[tarudeep07]

I think - recent California stimulus payment is not taxable. However, Turbotax is lowering my state and federal refund after I enter this amount.

[DMarkM1 · Accepted solution]

Assuming your question is about the CA Middle Class Tax Refund (MCTR) you are correct the amount is non-taxable.  You probably received a form 1099-Misc which is how you enter the amount.  The latest update in TurboTax should correctly handle the MCTR payment. 

1. Go back to the "Wages and Income" section.
2. "Edit" the 1099-Misc
3. "Delete" the form entry
4. Click "Done"
5. On the summary page scroll down to "Other Common Income" 
6. "Revisit" the 1099-Misc topic
7. Re-enter the form information
8. You will arrive at a page titled "Does one of these uncommon situations apply?"
9. Click the button "This was a California Middle Class Tax Refund (MCTR)
10. Finish the interview section.

This will automatically exclude this amount from federal income. On the federal tax return, the MCTR payment will reflect as a positive amount, as well as a separate negative amount.  

Both the positive and negative amounts will show on line 8z on the Schedule 1.  You can see these entries in the forms view for desktop versions or in the online versions by following these steps:

1. "Tax Tools" in the left hand menu
2. "Tools"
3. "View Tax Summary" in the main screen
4. "Preview my 1040" in the left hand menu

The income will no longer be in the Federal Adjusted Gross Income amount and therefore will not transfer to the CA tax return either.

[hbl3973]

This is actually a gray area right now.  It is not taxed by California but may be taxable by the IRS.  See

https://ktla.com/news/california/do-you-need-to-report-your-inflation-relief-check-when-filing-taxes...

for what appears to be the current thinking on this.

For now it is best to consider it taxable and, if later deemed nontaxable by the IRS (or the courts), file an amended return for a refund or, possibly, sit back and wait for the IRS to do it on its own if they say they would do it automatically.

[hbl3973]

Yesterday, Champ Bsch4477 posted that he was notified California Tax-Aide (the TCE side of the IRS overseen VITA/TCE) is taking the MCTR payments as nontaxable by the federal government as well as the state of California.

[JRClarkinNapa]

This was an accurate and helpful answer.  Thanks.

[tarudeep07]

Thx for the confirmation.

[ErnieS0]

IRS officially announced it will not tax the California Middle Tax Refund and general welfare and disaster payments issued by other states.

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

• Alaska [1]
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois [2]
• Indiana
• Maine
• New Jersey
• New Mexico
• New York2
• Oregon
• Pennsylvania
• Rhode Island

For a list of the specific payments to which this applies, please see this chart.

Learn more at IRS issues guidance on state tax payments to help taxpayers.

@JRClarkinNapa