Phoenix, Arizona – Families in Arizona should include last year’s state rebate as part of their income when filing their taxes, according to a recent federal court ruling. The decision comes after Attorney General Kris Mayes’ request for a preliminary injunction to block the IRS from taxing the rebates was denied by a judge. The rebates, which were distributed to nearly 750,000 Arizona families, will now be subject to federal taxation.
U.S. District Court Judge Murray Snow stated that he lacked sufficient information to determine if the court has jurisdiction over whether taxing the rebate violates Arizona’s sovereign power. In his ruling, Judge Snow acknowledged the United States’ right to tax its citizens and declined to declare that the state tax rebate is exempt from federal taxation.
The case revolves around a complaint filed by Attorney General Mayes in February. The complaint argues that the rebates should be tax-free from the IRS, citing similar programs in other states that have been exempted from federal taxes. The state Legislature, led by the conservative Arizona Freedom Caucus, utilized a portion of the state’s surplus to provide monetary relief to families with dependent children. The legislation exempted the payouts from state tax and assumed that federal tax would not apply.
However, the IRS and many tax professionals disagree, asserting that the rebates are subject to federal taxation. The state Department of Revenue did not take a position on the matter but advised taxpayers to file a 1099-MISC form to report the income in case the rebate is federally taxable.
The rebates varied between $100 and $750, depending on the number of children and their age within a family. For filers in the 22% federal tax bracket, a $750 rebate would result in a $165 tax. This bracket applies to married couples who file jointly and earned between $89,451 and $190,750 in 2023, according to IRS guidelines.
A spokesperson for Attorney General Mayes’ office mentioned that she filed an extension for her tax returns due to her mother’s passing during that time. The spokesperson confirmed that her return will include the 1099-MISC form when filed. However, the attorney general’s office cannot provide tax advice and advises Arizonans with questions to consult a tax professional.
The federal court case will proceed as the judge’s ruling means that Arizona families will need to account for the rebates as taxable income when filing their taxes.