Will You Have to Pay Federal Tax on the Arizona Rebate of $750?

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Arizona families who recently received a rebate of $750 may have to share some of it with the federal government. The IRS recently ruled that rebate recipients will have to report it as income, and thus, they may have to pay federal tax on the Arizona rebate. The Arizona Department of Revenue has already issued a notice about the same.

Federal tax on the Arizona rebate: what to do

On Tuesday, the state Department of Revenue informed about the Internal Revenue Service’s (IRS) decision to tax the Arizona family tax rebate. It implies that recipients will have to pay federal tax on Arizona rebate when they file 2023 tax returns this year.

“The IRS has determined the Arizona Families Tax Rebate recently sent to eligible taxpayers is subject to federal income tax and is required to be reported as part of the federal adjusted gross income,” the Arizona Department of Revenue said in a press release.

Further, the department cleared that the rebate won’t be subject to Arizona income tax. Thus, taxpayers will have to subtract the rebate amount from the federal adjusted gross income when filing their 2023 Arizona individual income tax return.

Arizona’s Department of Revenue will inform affected taxpayers by mail to visit the online portal to access their 1099-MISC, which informs about the rebate amount received. Alternatively, taxpayers can also view their bank account to confirm the rebate they received.

The DoR will add Form 1099-MISC to its online portal from January 31. A copy of this form goes to the IRS as well. So, not including the rebate when filing 2023 tax returns due in April could result in extra paperwork and a delay in refund.

Not the first time

A federal tax may significantly reduce the relief money, especially for those who need it the most. In all, there are seven tax brackets, ranging from 10% for individuals with a federally adjusted gross income of up to $11,000 to 37% for those earning $578,126 or more.

So, a person receiving a rebate of $750 and falling in the 10% tax bracket will have to pay $75 in tax to the federal government.

It is not the first time a state tax rebate has been subjected to federal taxes. The Associated Press reported last month that the Minnesota tax rebate of $260 will be subject to federal income taxes. At the time, Minnesota Governor Tim Walz remarked that the state was treated unfairly because it missed a cutoff.

Similarly, recent confusion over the federal tax treatment of the TABOR refund from Colorado was cleared following a meeting between Gov. 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. Later, it was cleared that there would be no change in the tax treatment of TABOR refunds, i.e., no federal tax on TABOR refunds from Colorado.