State leaders push back on IRS for taxing Arizona Families Tax Rebate

PHOENIX — Arizona leaders from both parties are pushing the IRS to reverse its decision to treat the state’s family tax refund program as taxable income on federal returns.

With tax season fast approaching, the IRS determined earlier this month that recipients of last year’s Arizona Families Tax Rebate need to report it as part of their 2023 federal adjusted gross income.

The rebates were part of the state budget signed by Gov. Katie Hobbs in May 2023. More than 700,000 families were eligible to receive $250 per dependent under age 17 and $100 per dependent over 17, with a $750 total cap. The dependents had to be claimed on the prior year’s returns.

The Arizona Department of Revenue said taxpayers should access their 1099-MISC forms through an online portal after Jan. 31 to determine if they received the rebate and the amount.

Who is pushing IRS to reverse Arizona family tax rebate ruling?

The Arizona Families Tax Rebate is not subject to state income tax, so the amount should be subtracted from the federal adjusted gross income on state tax forms.

However, Arizona Attorney General Kris Mayes, a Democrat, and state Senate President Warren Petersen, a Republican, are pushing the IRS to make the rebates non-taxable, which would save families money and simplify the process for filers.

They each contacted IRS Commissioner Daniel Werfel this week to argue against the ruling.

“The IRS should act promptly to reverse this decision and provide clear guidance to Arizona taxpayers as tax season nears,” Mayes said in a press release Thursday in which she announced she’d sent a letter to Werfel on the matter. “If they do not, my office is prepared to examine all legal avenues to ensure these dollars stay in the pockets of Arizona taxpayers.”

Petersen also sent Werfel a letter Thursday after issuing a press release last week saying he’d been in contact with Mayes’ office, the Arizona Department of Revenue and U.S. Sen. Kyrsten Sinema’s office about the issue.

The release said that more than a dozen other states have passed similar legislation, and the IRS didn’t tax those rebates.

“It makes zero sense that the IRS is choosing to hurt Arizona families by taxing a tax rebate,” Petersen said in the release.

“I’m thankful for the help from Sen. Sinema’s office in working to get this matter front and center with the IRS and U.S. Treasury. With tax season less than two weeks away, time is of the essence.”

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