Tax Rebates Could Be Taxed Again

Arizona residents who receive a families tax rebate will have some of it taxed by the Internal Revenue Service (IRS).

The Arizona Department of Revenue (AZDOR) announced on January 16 that those who received the Arizona Families Tax Rebate will need to report it on their tax returns, meaning it is subject to federal income tax.

In a letter dated January 25, Arizona Attorney General Kris Mayes urged the IRS to reconsider. "I write regarding the Internal Revenue Service's determination that Arizona's General Welfare Income Tax Rebate ("Tax Rebate") is subject to federal taxation...This determination...appears to contradict the IRS's recent decisions concerning similarly situated state programs and taxpayers, and to be highly arbitrary."

The rebate pays out $250 per dependent under 17 years old, with a cap of $750 dollars for eligible families. The department describes the rebate as "family-first funds" that "recognize your contributions to our thriving state, and we could not be more excited to put money back in your pocket." Nearly 750,000 families are eligible to receive it, according to Democratic Governor Katie Hobbs.

A spokesperson for Arizona Department of Revenue told Newsweek that the decision to make the rebate taxable on federal returns was down to the IRS. They said: "The determination was not made by the Arizona Department of Revenue. The rebate remains exempt from Arizona state tax. Arizona is required by the IRS to provide a 1099-MISC form to those taxpayers who received the rebate, as documentation to claim the income on their federal tax return." Newsweek has contacted the IRS for comment via email.

Mayes, a Democrat, has said the IRS has no right to force families to pay taxes on the rebate, claiming that some families will end up paying the entire rebate to the IRS.

"Many more Arizonans will be federally taxed on the entire rebate, even though they paid at least some state taxes in an eligible year," Mayes wrote in a letter to IRS Commissioner Daniel Werfel, before going on to threaten legal action. "If we are not able to satisfactorily resolve this issue by then, I will consider all possible avenues for potential legal action on behalf of the state and its taxpayers in advance of this year's filing deadline."

She also said that payments made to individuals by the government under "legislatively provided social benefit programs for the promotion of the general welfare" need not be included in the federal gross income, and therefore be subject to taxation. In her letter, Mayes cites similar programs in Alaska, California, Colorado, Delaware, Idaho and Indiana that were not subject to federal income tax.

Republican state Senate President Warren Petersen has also pushed for the IRS to reverse its decision, also sending a letter to Werfel. "It makes zero sense that the IRS is choosing to hurt Arizona families by taxing a tax rebate," he said in a press release issued on January 19.

However, he disagreed with Mayes on the prospect of enacting legal action. He said: "While litigation likely isn't the best approach, I appreciate the Attorney General's office reaching out to us on this matter."

It is not the first time a tax rebate has been made taxable. In Minnesota, the state government announced in December that part of a rebate would be subject to federal income tax. In a letter, the IRS said that the income thresholds were above the limit of "what we generally consider to be covered by the general welfare exclusion," according to a report by the Star Tribune.