Arizona families who received a rebate last year worth up to $750 per family will now have to pay federal taxes on it, following a ruling by U.S. District Court Judge Murray Snow. Arizona Attorney General Kris Mayes had attempted to exempt the rebate under Internal Revenue Service rules, but the bid was rejected. The $260 million that went back to Arizona families will now be taxed according to standard IRS rules, as it did not meet the criteria for tax-free treatment under legislated social benefit programs based on individual need. The program was approved by Republican lawmakers and benefited 750,000 families in the state.
The rebate program allowed for direct payments to any family with dependents, regardless of specific income status, as long as they had paid at least $1 in state income taxes in recent years. Families received $250 per child under 17 and $100 for older dependents, leading to some households receiving up to $750 in total. Despite Mayes’ efforts to exempt the rebate from federal taxes, Snow ruled that the federal government is permitted to tax the rebate, resulting in potential losses of $20.8 million for Arizona families. While the exact amount owed will vary depending on tax brackets, individuals earning between $44,726 and $95,375 may have to repay $110.
Mayes will continue legal proceedings to have the rebate declared tax-exempt by the federal government, which could result in extra tax refunds for Arizona families. However, Snow stated that individual states do not have jurisdiction over federal tax matters, indicating that Mayes’ efforts may face further challenges. The lawsuit argues that the payments should not be subject to federal taxes as they were not compensation for services and were distributed during a period of extreme inflation. The decision to tax the rebate has been met with criticism from financial experts who believe the original intent of helping Arizona families through the rebates is being undermined by the tax requirement.
The ruling highlights the complexities surrounding federal taxation rules for state rebates and the impact it has on individuals and families. While the IRS typically provides tax-free treatment to funds distributed to targeted groups based on need, the Arizona family rebates did not meet these criteria, leading to the requirement for federal taxes. The situation serves as a reminder of the challenges faced when balancing state and federal tax regulations, and the potential financial burden it can impose on taxpayers. Despite the setback, efforts to exempt the rebate from federal taxes are ongoing, with the hope of providing relief to Arizona families who have already received the rebates.
