How the Middle Income Tax Refund Works

A Middle Income Tax Refund is a one-time payment from a state government designed to offer financial relief to residents, often in response to economic pressures like rising inflation or high gas prices. The goal is to return a portion of state funds to taxpayers within certain income brackets, distinguishing it from annual tax refunds based on an individual’s overpayment of taxes. This distribution is intended to ease the burden of increased living costs for a large segment of the population.

Eligibility Requirements

Qualification for a middle-income tax refund hinges on criteria tied to a prior tax year, often the 2020 tax return. A condition is the timely filing of that year’s state tax return, which for many programs had a deadline of October 15, 2021. Amending a return after the fact would not make a taxpayer eligible for the payment. This requirement ensures the refund is based on final tax data from a specific economic period.

Residency is another requirement. An individual must have been a resident of the issuing state for at least six months during the qualifying tax year, such as 2020. The person must also be a resident of that state on the date the payment is issued. This rule ensures funds are directed to individuals with a consistent and current connection to the state’s economy.

Income levels, using the California Adjusted Gross Income (AGI), are used to determine eligibility. For the 2020 tax year, single filers or those married filing separately were required to have an AGI of $250,000 or less. The threshold was higher for other filing statuses, with married couples filing jointly, heads of household, and qualifying widow(er)s needing an AGI of $500,000 or less to qualify.

An individual’s dependency status is also a factor. To receive the payment, a person could not have been eligible to be claimed as a dependent on another person’s 2020 tax return.

Calculating Your Refund Amount

The refund amount is determined by a tiered system based on three factors from the 2020 state tax return: AGI, filing status, and whether at least one dependent was claimed. This structure provides larger payments to those with lower incomes and those supporting dependents. For example, a married couple filing a joint return with a California AGI of $150,000 or less received $700, but if they claimed a dependent, the amount increased to $1,050.

The payment amounts decrease as income levels rise. A single filer with an AGI of $75,000 or less received $350, which doubled to $700 if they had a dependent. For those in a higher income bracket, such as a single filer with an AGI between $75,001 and $125,000, the payment was $250 without a dependent and $500 with one.

A Head of Household filer with an AGI up to $150,000 received $350, or $700 with a dependent. For married couples filing jointly with an AGI between $250,001 and $500,000, the payment was $400, increasing to $600 if they claimed a dependent on their 2020 return.

Receiving Your Payment

The distribution of refund payments was handled through two methods: direct deposit or a prepaid debit card. The method a recipient received was determined by how they handled their 2020 state tax return. Taxpayers who e-filed their 2020 return and received their state tax refund via direct deposit received the middle-income payment the same way.

For other eligible recipients, payments were mailed as a debit card. This group included those who filed a paper tax return, had a balance due on their 2020 return, or received their original tax refund as a paper check. The debit cards were mailed in a plain envelope, so recipients were advised to watch for mail from the issuing agency to avoid accidentally discarding the payment.

The payments were issued in waves over several months. The bulk of the direct deposits and debit cards were sent out between October 2022 and January 2023.

Tax Implications of the Refund

The Internal Revenue Service (IRS) clarified that these state relief payments are not subject to federal income tax. In news release IR-2023-23, the IRS stated it would not challenge the tax-exempt status of these payments. Consequently, recipients did not need to report the payment as income on their federal tax returns.

For state tax purposes, the payment is also considered non-taxable by the issuing state. Even if a Form 1099-MISC was issued for payments of $600 or more, the amount did not need to be reported as income on either federal or state returns.