CA’s Middle Class Tax Refund: What To Know

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

If you filed a 2020 California tax return, you likely noticed a surprise deposit to your bank account or received a debit card in the mail. The state of California began issuing MCTR (Middle Class Tax Refund) payments to millions of Americans starting last October.

In addition to the payment, you will also be receiving a Form 1099-MISC from the state of California in the mail any day now.

Sign up for the AFP newsletter to receive weekly updates and blog posts!

Here is what you should know about the MCTR payments:

What is it?

Never heard of it? Maybe you remember Governor Gavin Newsom proposing “gas rebates” or “inflation relief payments” to help residents with the rising cost of living. The final name became the Middle Class Tax Refund.

These payments are intended to “provide financial relief for Californians who may have been adversely impacted” by the “increased costs for goods, including gas, due to inflation, supply chain disruptions, the effects of the COVID-19 emergency, and other economic pressures.”

Who is eligible?

To be eligible for the payments, you must:

  • Have filed your 2020 tax return by October 15, 2021
  • Meet the California income limits (described below)
  • Were not eligible to be claimed as a dependent
  • Were a California resident for six months or more
  • Are a California resident on the date the payment is issued

What can you receive?

The amount you are eligible to receive is based on your California AGI (Adjusted Gross Income), filing status, and whether you had dependents:

Will you owe taxes?

The state of California is very clear that the MCTR payment is not taxable for California state income tax purposes and that you do not need to claim the payment as income on your California income tax return.

However, they are pretty ambiguous when it comes to Federal taxes. The official wording states that “the MCTR payments may be considered federal income. You should consult the IRS or your tax professional regarding the federal tax treatment of these payments.”

Here are some points to consider:

  • Welfare benefits paid out by a government institution are typically not taxable income
    • Over the years, the IRS has concluded that payments to individuals by government units, under legislatively provided social benefit programs, for the promotion of the general welfare, are not includible in a recipient’s gross income. This is known as the General Welfare Doctrine
      • The welfare must be based upon the recipient’s need
    • The Franchise Tax Board describes the payment as “offering relief from rising prices”
  • California had previously issued the Golden State Stimulus payment to low- and middle-income residents for Coronavirus relief
  • State tax refunds are taxable as Federal income under the following situation:
    • You itemized your deduction on your prior year’s Federal income tax return
    • You elected to deduct your state and local income taxes
    • Your state refund is taxable to the extent that it’s more than the refund you would have received should you have instead chosen:
      • The standard deduction
      • General sales tax (whichever is higher)
  • Receipt of a tax form (i.e., a 1099-MISC) should always be reported on your income tax returns. Failure to do so could potentially trigger a notice from the IRS
    • The American Rescue Plan Act of 2021 allowed taxpayers to exclude a portion of their unemployment benefits (which are reported on Form 1099-G) depending on their income. This provision was enacted midway through tax season, which required many taxpayers to file amended tax returns

Understanding the potential tax implications of the MCTR can help ensure that you file your tax returns correctly. If you would like to work with a financial planner to walk you through your options, I would love to help you!

To learn more about becoming a client, schedule a complimentary meeting now!

Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.