Will you have to pay taxes on the Middle Class Tax Refund you received? Maybe

SAN FRANCISCO (KGO) -- About 16 million Californians received a Middle Class Tax Refund from the state in 2022-- a one-time gift meant to offset high gas prices and crippling inflation.

But now, millions are finding out they may have to pay income taxes on those payments. 7 On Your Side's Michael Finney says the IRS may (or may not) take a chunk of your money.

The state has been sending out 1099 tax forms to millions of Californians who got an inflation relief payment of $600 or more. It means they must report the income to the IRS. However, the feds are still deciding whether to tax the payments or not.

So, can you avoid the tax? It may be possible.

The Middle Class Tax Refund arrived at what seemed like just the right time, with gas prices hitting $7 a gallon and grocery bills soaring, the state rushed out inflation relief payments.

MORE: Couple tries everything after ATM 'eats' their $700 inflation relief debit card

"We could use it for groceries," said Tom Koerber of San Rafael.

"Christmas presents for our grandkids," said Don Brendel of San Francisco.

Millions received payments ranging from $200 per person to $1,050 for families, but now the feds may take a bite.

"It's going to be up to the IRS," said Norman Golden, an IRS enrolled agent.

Yes, the IRS is still deciding whether or not you must pay taxes on your relief payment.

MORE: Here are the most frequently asked Middle Class Tax Refund questions

"I would hope and imagine that the IRS within the next month would come out with some ruling," said Golden. Golden says if the IRS believes the payments were meant for economic relief, they'd qualify for a tax break.

"It has to be for the promotion of general welfare. It was at a time when it was going to counteract inflation, higher gas prices, which is part of inflation. So there's a very good argument that it would qualify," said Golden.

But there is no ruling yet, even as taxpayers are filing returns.

Golden says the IRS may be reluctant to let go of potentially huge tax revenues. California spent more than $9 billion on relief payments.

MORE: Cash in your CA inflation relief cards ASAP before scammers get it, officials say

"You think of all the people in California that, that got this and you pick an average tax rate, that's going to be a lot of money that federal government is going to lose out on," said Golden.

If you got a $700 payment, for example, and you're in a 25% tax bracket, you would have to pay $175 of your payment to the IRS.

Golden says to report the income, but then ask to back it out -- citing the so-called "general welfare" exclusion. If you're denied, he says, be happy you get to keep the rest of the money.

"Sometimes you just hate to say it, but throw in the towel and just say, 'Well, that's how it is,'" said Golden.

The good news is, you do not have to pay state taxes on this income. Also, if your inflation relief payment was less than $600, you won't get a 1099-MISC/ The IRS will not have a record of this income, though it is still reportable on your federal returns.

Take a look at more stories and videos by Michael Finney and 7 On Your Side.

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