Is Oklahoma Parental Choice Tax Credit taxable at the federal level or not? Need an actual answer!

[Trygg]

There are lot of people going back and forth over this one, but I haven't seen a definitive answer yet. A bunch of us in Oklahoma got 1099-G forms for the money we received through the Oklahoma Parental Choice Tax Credit initiative. The state has declared that this income in not taxable on the state level but may or may not be taxable on the federal level, which is not helpful (like so many things in Oklahoma).

TurboTax has a way to enter this 1099-G on the state form for Oklahoma, and it doesn't increase taxes due or decrease your refund. There's no good option yet for reporting this on the federal form in TurboTax. If you attempt to enter the information as a typical 1099-G (like you get for getting a tax rebate from the state) you can't select the proper year (Box 2 says 2024, whereas the pulldown menu on TurboTax Federal only goes to 2023 — which we used for our regular tax rebate 1099-G, by the way, but that's neither here nor there).

There seem to be two schools of thought here:

1. It IS taxable income, so you have to trick the system by entering it as a 1099-G under miscellaneous or something like that and designate it as a "taxable grant." Basically, you're saying, "OK, this is a new form I got from Oklahoma that there's no option for, but I'm guessing I probably owe tax on it so I'm going to pretend this is some other kind of income but the amount will be the same so you can tax it." The problem is that this deducts taxes from BOTH your federal and state returns in TurboTax because now the Oklahoma return thinks you've got this nondescript "taxable grant" somehow. If there were some way to say "I'll pay federal taxes on this 1099 but turn off that option for the state return" that'd be great, but I don't think that exists.

2. It's not taxable income ... probably ... but since they put "2024" on the 1099-G I'm gonna wait and file this with my 2025 taxes (in 2026) like I would for a tax rebate I'd get for my 2024 return. This seems like a dumb idea, too.

I talked with a CPA friend this morning who said that if Oklahoma isn't charging taxes on this program, the feds shouldn't, either. If you can, enter the 1099-G form on your taxes but don't pay any extra for it (or don't deduct any from your rebate). If it turns out you do need to pay taxes on it, it's easier to amend a return next year than to find out you didn't need to pay taxes on it and then try to get that money back from the IRS.

So far, I can't find an option to report the 1099-G to the feds and not pay taxes on it. Any ideas?

[KrisD15]

There is no definitive answer because the IRS as not addressed the issue and has not made a ruling. 

South Carolina has a similar credit, but their credit is taken on the South Carolina state tax return, and included with the state tax refund the following year. If the South Carolina taxpayer takes the Standard Deduction on their Federal return (as most taxpayers do) they do not need to claim the extra credit in the refund. 

Oklahoma reports the credit on a separate 1099-G before the end of the year the credit is actually applied, so the process makes determination of taxability unclear. 

Contact your local representative and ask them to change the process on how the credit is applied so it is included with your state refund, not as a separate 1099-G. 

[Trygg]

Thanks! Any idea what I should do this year? Pay tax on the 1099-G or not?

[KrisD15]

The decision is yours, but I believe the 1099-G Oklahoma sends doesn't even enter properly on any of the TurboTax entry screens. 

I agree with your CPA friend and don't claim it, but I wouldn't try to enter/report it either. There is no place to enter that 1099-G and then back it out. 

Non-taxable state refunds reported on 1099-G are left off the tax returns, as are other tax-free government payments reported on 1099-G.

You could file your returns and, if before April 15th, the IRS rules the credit needs to be claimed as income, amend your return and include the 1099-G at that time.