Arizona residents received some bad news this week: Rebates they received last year are subject to more taxes.
This week, the Internal Revenue Service announced that a one-off tax rebate that Arizona issued last year is indeed subject to taxes, even though the state has fought against that.
The Department of Revenue said that people who received the Arizona Families Tax Rebate have to report it on their tax returns, as all that money is subject to taxation by the federal government. Local lawmakers challenged that decision, but IRS lawyers doubled down, insisting that income taxes can be levied on the rebate.
The Your Valley news site, which is based in Arizona, issued a report that said the IRS confirmed that those payments qualify as income under federal law. As a result, anyone who received them have to report the income and pay taxes on them by this year’s tax filing deadline, which is April 15.
Residents in Arizona were able to receive a $250 rebate for every dependent they had under the age of 17. Eligible families had a total cap of $750 on that rebate.
Kris Mayes, the attorney general in Arizona, said about 750,000 families in the state were eligible to receive the rebate.
To qualify for the rebate, taxpayers had to have claimed the dependent tax credit in the state on their 2021 full-year income tax return, and also earned at least $1 of individual income tax in Arizona on their returns for 2019, 2020 or 2021.
The decision by the IRS comes after Mayes sued the agency after it informed ADOR that the state’s rebate didn’t qualify for an exemption like some other similar rebates that other states have passed did.
The complaint that Mayes filed read:
“The IRS’s unlawful determination is so arbitrary, capricious and inequitable as to constitute an unlawful targeting of Arizona and its taxpayers in a manner that deprives Arizona of its right to make informed budgetary decisions in the best interests of the State and its taxpayers.”
According to Retuers, Mayers further commented:
“This lawsuit is about standing up for Arizona taxpayers. The federal government’s decision to tax these rebates is unfair and unlawful — and I will do everything I can to ensure the tax relief provided to Arizonans by their state government remains in the pockets of Arizona taxpayers, as intended.”
An ADOR spokesperson had previously mentioned to Newsweek that the ultimate decision to make the refund amount subject to federal taxes lay with the IRS. The spokesperson said:
“The determination was not made by the Arizona Department of Revenue. The rebate remains exempt from Arizona state tax.
“Arizona is required by the IRS to provide a 1099-MISC form to those taxpayers who received the rebate, as documentation to claim the income on their federal tax return.”
All of this is despite the fact that just about every leading politician in Arizona — and top state officials — have railed against this decision.
