California Senators Make Urgent Plea to IRS: Protect Middle-Class Refunds from Federal Taxation

Senators Dianne Feinstein and Alex Padilla of California have written to the Acting Commissioner of the Internal Revenue Service, Douglas O’Donnell, to request clarification on whether the state’s middle-class tax refunds will be subject to federal income tax, based on an article released by the official website of the Office of Senator Dianne Feinstein.

The California state legislature voted to provide financial aid to middle-class residents in amounts ranging from $200 to $1,065 and decided that these payments would not be subject to state income tax. The senators are calling for equal treatment under the federal tax code and believe that the state’s refunds clearly fulfill the three requirements for the general welfare exclusion from federal income tax liability.

Based on a report by the Sierra Sun Times on February 8, 2023, senators wrote in their letter that they believe the state’s financial aid meets the three requirements for exemption from federal income tax, as it is a legislatively provided program for social benefit and not in compensation for services. The legislation refers to the payments as “economic relief” and states that they serve the purpose of providing financial relief for Californians affected by economic disruptions.

The senators are hopeful that the acting commissioner will act swiftly to clarify that the state’s middle-class tax refunds are not subject to federal income tax. They noted that a number of constituents have asked about the tax implications of the payments and that the Acting Commissioner had indicated that he would provide clarity on the issue soon. The senators concluded the letter by thanking the acting commissioner for his consideration and expressing their willingness to assist with any questions.