Is the California Middle Class Tax Refund Taxable?

California issued the Middle Class Tax Refund (MCTR) as a one-time payment to help residents manage rising costs. Many recipients are now wondering whether this payment is subject to federal or state taxes, which could impact their overall tax liability.

Understanding how the IRS and California treat the MCTR for tax purposes is essential before filing your return.

Federal Income Considerations

The IRS determines whether state-issued payments are taxable based on specific criteria. Since the Middle Class Tax Refund was categorized as economic relief rather than a traditional tax refund, its federal tax treatment required evaluation.

Criteria for Taxable Refunds

State tax refunds are typically taxable at the federal level if the taxpayer previously claimed a deduction for state income taxes under the itemized deduction method. This follows the “tax benefit rule,” which states that if a taxpayer received a deduction in an earlier year that resulted in a tax benefit, any later refund related to that deduction is taxable.

However, the Middle Class Tax Refund was not tied to state tax payments or overpayments. Instead, it was a relief payment issued independently of prior tax filings. The IRS generally considers whether such payments serve as a rebate or economic relief and whether they replace taxable income sources, such as unemployment benefits or wages, when determining their taxability.

Possible Exclusions

Certain government payments are excluded from federal income taxation under specific provisions of the Internal Revenue Code. Disaster relief payments, for instance, are often exempt if they cover necessary personal expenses due to a federally declared disaster. While the MCTR was issued in response to economic hardship, it was not classified as a disaster relief payment under federal guidelines.

Another potential exclusion applies to “general welfare” payments, which assist individuals with financial need and are not considered taxable income. The IRS has, in some cases, allowed relief payments to qualify under this exclusion when they are broadly distributed without requiring repayment or service in return. Whether the MCTR meets this definition depends on IRS interpretation.

Specific IRS Guidance

Following the distribution of the Middle Class Tax Refund, the IRS released guidance in February 2023 stating that recipients would not need to report the payment as taxable income on their federal returns. The agency cited “public benefit” considerations and administrative complexity as reasons for this decision. This ruling aligned with past IRS decisions regarding similar state-issued payments. However, taxpayers should be aware that IRS guidance can change, and future relief payments may not receive the same treatment. For the most up-to-date information, taxpayers should refer to IRS publications and announcements.

State Implications

California does not consider the Middle Class Tax Refund taxable income for state tax purposes. Since the payment was structured as a relief measure rather than earned income or a rebate of previously paid taxes, it does not meet the criteria for inclusion in California’s taxable income calculations. The Franchise Tax Board (FTB) explicitly stated that residents do not need to report the payment on their California state returns.

Because California does not tax the MCTR, recipients do not need to worry about it affecting their state-adjusted gross income (AGI) or triggering additional tax liabilities. The exclusion of the MCTR ensures that it does not interfere with tax planning strategies or financial aid calculations tied to state income levels.

Reporting on Tax Returns

Since the IRS determined that the Middle Class Tax Refund is not taxable at the federal level and California does not require it to be reported as income, most taxpayers will not need to include it on their tax returns. However, understanding where such payments would typically be reported and what documentation should be retained can help ensure accurate tax filing.

Placement on Forms

If the IRS had deemed the MCTR taxable, it would have been reported on Form 1040, Schedule 1, Line 8z (“Other Income”). Since the IRS excluded the MCTR from taxable income, taxpayers do not need to enter it on this form. However, those using tax preparation software should verify that the payment is not mistakenly included in the income calculation.

For state tax purposes, California does not require any reporting of the MCTR on Form 540, the state’s individual income tax return. Unlike some state refunds that may appear on Schedule CA (California Adjustments) to reconcile differences between federal and state taxable income, the MCTR does not require any such adjustment.

Adjustments in Income

Although the MCTR does not impact taxable income, taxpayers should be aware of how similar payments could affect their financial situation in other contexts. If a future relief payment were deemed taxable, it could increase Adjusted Gross Income (AGI), which is used to determine eligibility for various tax credits and deductions. A higher AGI can reduce benefits such as the Earned Income Tax Credit (EITC) or Premium Tax Credit (PTC) for health insurance subsidies.

Additionally, some income-based repayment plans for federal student loans use AGI to calculate monthly payments. If a relief payment were included in AGI, it could temporarily raise required loan payments. While the MCTR does not have this effect, taxpayers should always review how any additional income—whether taxable or not—might influence financial aid, government benefits, or other income-sensitive calculations.

Supporting Documentation

Even though the MCTR does not need to be reported on tax returns, recipients should retain records of the payment in case of future inquiries. The Franchise Tax Board (FTB) issued Form 1099-MISC to individuals who received $600 or more from the program. While this form is typically used to report miscellaneous income, the IRS clarified that the MCTR is not taxable, meaning the form does not require action for federal tax purposes. However, keeping a copy of the 1099-MISC and any correspondence from the FTB can be useful for personal records.

For those who did not receive a 1099-MISC but still obtained an MCTR payment, bank statements or payment confirmation emails can serve as alternative documentation. This is particularly important for individuals who may need to verify income sources for loan applications, financial aid, or other financial assessments.

Nonresident or Part-Year Filing Scenarios

Taxpayers who lived in California for only part of the year or resided in another state but received the Middle Class Tax Refund must determine whether they have any filing obligations related to the payment. Residency classifications impact how income is reported and taxed, especially when dealing with relief payments issued by a specific state. California uses Revenue and Taxation Code (R&TC) Section 17014 to define full-year residents, while R&TC Section 17015.5 outlines rules for part-year and nonresidents. These distinctions determine whether a taxpayer must report California-sourced income.

For part-year residents, income earned while residing in California is typically subject to state taxation, but the MCTR does not fall under taxable income per Franchise Tax Board (FTB) guidance. If a taxpayer moved out of California during the year and received the payment afterward, they may wonder if their new state considers it taxable. Since the MCTR is structured as a relief payment rather than compensation for services or investment earnings, most states will not classify it as taxable income. However, taxpayers should review their new state’s tax code to confirm whether similar payments are treated differently.

Nonresidents who lived entirely outside California but received the MCTR—in cases where they previously filed California tax returns or met eligibility criteria—do not have to report the payment for California tax purposes. The state does not tax nonresidents on income that is not California-sourced, and the MCTR does not meet the definition of California-source income under R&TC Section 17951. This means that even if a nonresident received the payment while living in another state, it does not create a California filing obligation.