Is anyone else having trouble filing a 1099-MISC for State of California Franchise Tax Board-MCTR? My status says rejected and that I have to check on the 27th. weird?

[rickity3]

My refund status says rejected and that I have to refile on or after Jan 27th because of product problems.  This seems really odd.

[Mommyof4girlz]

same here

[DianeW777 · Accepted solution]

It depends.  The following will provide the steps to enter the income for federal and remove it for California (CA) where it is not taxable.

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

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.

[Mommyof4girlz]

@ DianneW777 i submitted my 1099 and it got rejected because of that form. i received $700 for the mctr. and its just telling me to wait until january 27 to refile. 

[Cw7793]

I have the same exact problem please keep us all updated if get fixed.

[Mommyof4girlz]

yes im trying to figure this out and so many people just refiled without adding the 1099 and got accepted. so im hopeful its just that we dont have to file it after all.

[DianeW777]

Just to be clear, if you did not itemize your deductions last year (2021), then this amount should not be taxable on your federal return.  If this is the case, you can remove or delete this form from your file.  Keep it with your tax records should there be any question later.

[Mommyof4girlz]

is this federal you are talking about? If so then why is California sending 1099 misc if we dont have to file it?

[LosRubios]

I'm using the download version of TurboTax 2023 Deluxe (so it handles 1099-MISCs as part of the purchase price).

We file as MFJ and got the 1099-MISC from the Franchise Tax Board and took a standard deduction in both 2021 and 2022.

I ran the Federal and State reviews which came back with no issues and e-filed the Federal return today - 1/26.

It was rejected due to the CA MCTR but the Customer Service message that accompanies the rejection says 'None'. The email message I received states "CA_MCTR_Payment - There is a potential issue with Form 1099-Miscellaneous if you received this form for payment of the California Middle Class Tax Refund."

If I click on the 'Learn More' button in the email, I just end up on a generic 'How do I fix a Rejected Return' page.

If I search TurboTax.com for CA_MCTR_Payment, I get a 'No results Found' message other than what is in the Community support pages.

When you enter the 1099-MISC info for the CA MCTR and then scroll through the Continue buttons, you get to the screen that is titled 'Does one of these uncommon situations apply?'

You then check the 'This was a California Middle Class Tax Refund (MCTR)'

TurboTax then prompts a message at the bottom, above the 'Continue' button that reads 'The California Middle Class Tax Refund (MCTR) will not be taxable on your California or Federal returns.'

The problem is that even when you have followed these prompts, the MCTR amount (in our case $700) still appears in Line 8 on Page 2 of the Federal Form 1040 (which comes from Schedule 1 line 8z) and is then included in the Total Income on Line 9 and flows down into the AGI.

On the Deductions on the Federal Form 1040, Line 14, there is no -$700 entry that would remove the MCTR payment from income (ours just has the standard MFJ $27,300 deduction).

So right now, as of January 26th, while the UI for TurboTax states that the MCTR is not taxable, it does appear that it is included in the Total Income on the Federal 1040 Return and Schedules which then becomes the number on which Federal taxes are calculated.

This is possibly why the Federal Return is being rejected.

I haven't tried filing the CA return as I want to make sure that the Federal Return is accepted before I send anything to the State due to the potential impact on the Federal Adjusted Gross Income of the current CA MCTR issue. That being said, the CA Form 540 created by TurboTax on 1/26 has automatically removed the $700 CA MCTR payment from the Adjusted Gross Income number that it has carried over from the Federal Form 1040.

[LosRubios]

Was just checking my 'filing status' in TurboTax and when I click on the 'Help Me Fix It' button for the rejected Federal Return, it takes me to a message that says that this is only impacting the Federal Return and will be fixed in a TurboTax update scheduled for January 27th 2023. It then explains the steps you will need to take to re-validate your Federal Return depending on whether you are using the online or download/CD version of TurboTax.

I would cut and paste it here, but the TurboTax download app won't let me copy the text but the essence of what you need to do is:

Log back into your return on or after January 27th

Select the Federal Taxes tab

Select the Federal Review tab

Run the Federal Review/Smart Check process

Re-file the Federal Return

The good news is that re-filing a rejected return isn't counted against the number of free Federal returns you can file (5 in the case of the Deluxe edition I'm using)

[SantinoD]

When entering the 1099-MISC CA MCTR , there will be a question asking if the payment is for the California Middle Class Tax Refund. Select “Yes” to automatically exclude this amount from federal income. Not answering this question correctly could cause e-file reject.

To get back to the 1099-MISC screen:

1. Open or continue your return
2. Select Search and search for 1099-misc
3. Select Jump to 1099-misc

 The MCTR is not taxable on the CA tax return, but no guidance has been provided by the IRS as to whether or not it is taxable on the federal tax return. Therefore, TurboTax software is not treating this payment as taxable income. 

Once we get more guidance from the IRS, we will notify you of the changes and how to handle them.

@LosRubios @rickity3

[LosRubios]

Yes, if you read my post from 1/26 you'll see that I had checked the 'MCTR' button when entering the 1099-MISC as you suggested however the issue was that the MCTR amount was still being included as part of the total income amount in the 1040.

I re-ran the Federal Review after downloading the 1/27 updates and the MCTR amount reported on the 1099-MISC is no longer included in Total or Adjusted Gross Income on the 1040, so it appears to be fixed now.

I have re-submitted the Federal return using e-file and I'm hoping it will be third time lucky.

[LosRubios]

@SantinoDThe Federal E-Filing when reporting a CA MCTR 1099-MISC is still getting rejected.

I downloaded the 1/27 update, rechecked everything in the 1099-MISC, including making sure that the MCTR button was checked and then re-ran the Federal Review which cleared with no issues.

The 1040 created by TurboTax no longer includes the 1099-MISC MCTR amount in the total or adjusted income.

However the e-filing is still being rejected even with the new 1/27 update.

This is becoming a complete joke.

[Mommyof4girlz]

i still havent received an email that it has been fixed. everytime i log in it still doesn’t let me correct it.

[Mommyof4girlz]

i dont see why we cant just leave the form out since its not taxable