Do I have to pay federal taxes on the $750 Arizona rebate?

An Arizona family that recently received a $750 rebate may have to share some of it with the federal government. The IRS recently ruled that rebate recipients must report it as income and therefore may have to pay federal taxes on Arizona rebates. The Arizona Department of Revenue has already issued a notice regarding this as well.

Federal Taxes on Arizona Rebates: What to Do

On Tuesday, the state Department of Revenue notified the Internal Revenue Service (IRS) of its decision to impose taxes on Arizona families’ tax returns. This means beneficiaries will have to pay federal taxes on the Arizona rebate when they file their 2023 tax returns this year.

“The IRS recently determined that Arizona family tax refunds paid to eligible taxpayers are subject to federal income tax and must be reported as part of their federal adjusted gross income,” the Arizona Department of Revenue said in a news release.

Additionally, the department said the rebates will not be subject to Arizona income taxes. Therefore, taxpayers must deduct the rebate amount from their federal adjusted gross income when they file their 2023 Arizona individual income tax return.

The Arizona Department of Revenue will notify affected taxpayers by mail that they can visit the online portal to access a 1099-MISC, which will tell them about the refund they received. Alternatively, taxpayers can check their bank account to see what rebate they received.

DoR will add Form 1099-MISC to its online portal starting January 31. A copy of this form will also be sent to the IRS. So, if you don’t include your refund when you file your 2023 tax return due in April, you’ll need additional paperwork and your refund could be delayed.

not the first time

Federal taxes could significantly reduce relief funds, especially for those who need it most. In total, there are seven tax brackets, ranging from 10% for individuals with federal adjusted gross income of up to $11,000 to 37% for individuals earning more than $578,126.

So, someone who receives a $750 rebate and is in the 10% tax bracket would have to pay $75 in taxes to the federal government.

This isn’t the first time federal taxes have been applied to state tax refunds. The Associated Press reported last month that Minnesota’s $260 tax refund would be subject to federal income tax. At the time, Minnesota Gov. Tim Walz said the state was being treated unfairly by missing the cutoff.

Likewise, recent confusion over the federal tax treatment of TABOR refunds in Colorado was resolved through a meeting between Governor Jared Polis and IRS Commissioner Daniel Werfel.

Initially, the IRS asked taxpayers to delay filing their 2024 taxes until a decision was made on the tax treatment of TABOR. It later became clear that there would be no change in the tax treatment of TABOR refunds. This means that federal taxes are not applicable on TABOR refunds in Colorado.