The California "Middle Class Tax Refund" Will Be Paid Out in October 2022 through January 2023

The State of California will be issuing tax refunds totaling about $9.5 billion to approximately 23 million Californians starting mid-October through mid-January 2023. This refund is called the Middle Class Tax Refund and was included in the $308 billion California state budget for the fiscal year July 1, 2022 through June 30, 2023.

The Middle Class Tax Refund payout will be as much as $1,050 per household, based on 2020 California “adjusted gross income” (CA AGI) on your tax return.

Qualifications:

• Must have filed your 2020 tax return by October 15, 2021

• Must have CA AGI that falls below certain parameters (shown below)

• Have been a CA resident for at least 6 months in 2020

• Was not eligible to be claimed as a dependent in 2020

• Must be a CA resident on the date the payment is issued

Payment Amounts on Married Filing Joint Tax Returns:

• CA AGI $150,000 or less: $1050 with dependent; $700 without dependent

• CA AGI $150,001 to $250,000: $750 with dependent; $500 without dependent

• CA AGI $250,001 to $500,000: $600 with dependent; $400 without dependent

(So let me get this straight. Our government is going to cut a check for $400 to a couple without kids who earned $500,000 in 2020. Mastro’s is going to be busy!)

Payment Amounts on Head of Household Tax Returns:

• CA AGI $150,000 or less: $700 with dependent; $350 without dependent

• CA AGI $150,001 to $250,000: $500 with dependent; $250 without dependent

• CA AGI $250,001 to $500,000: $400 with dependent; $200 without dependent

Payment Amounts on Single and Married Filing Separate Tax Returns:

• CA AGI $75,000 or less: $700 with dependent; $350 without dependent

• CA AGI $75,001 to $125,000: $500 with dependent; $250 without dependent

• CA AGI $125,001 to $250,000: $400 with dependent; $200 without dependent

How Payments Will Be Received

• If you filed electrically and used the direct deposit option on your return (assuming you had a refund), your payment will be received by direct deposit.

• Otherwise you’ll be paid via debit card.

For more information, visit the Franchise Tax Board “Middle Class Tax Refund” page at taxrefund.ca.gov.

Questions That Come to Mind (that are not addressed by the Franchise Tax Board):

• What happens if your banking information changed since then? Don’t know for sure but I suspect the payment would bounce and they would send you a debit card.

• What happens if your filing status changed from 2020 to today? For example, I was married in 2020 and filed jointly but am single and available (hint hint) today in 2022? Who gets our $1,050 (married, one dependent)? Me or my ex-spouse? Good question. No idea. The FTB did not provide alternative scenarios, so I’d imagine the primary spouse on the return will receive the payment.. You might have to track down the ex for your half.

• I was single in 2020 but am married today with a toddler. How much do I get? The FTB bases the payment on your filing status in 2020, so both you and your spouse will receive payments, if any, based on that.

• What happens if I lose the gift card? Well, you’ll have to bring that up with the FTB. Good luck! Best advice - don’t lose it.

• I didn’t file a tax return in 2020 because my gross income and CA AGI were less than the filing requirements published by the Franchise Tax Board. Otherwise, I met all the other requirements for the refund. How can I get it? Unless the FTB amends its initial rules to address your situation, it appears you are out of luck. But visit the taxrefund.ca.gov website for possible updates.

• I made $17.50 an hour at The Taco Shack in 2020 and will receive a $350 refund. My brother George pulled down $250,000 in 2020 as VP of Stuff at Bookoo Bucko, Inc. and will receive $200. How is that fair? Does that make any sense? Pretty much no, but let’s look at it in a different way. You’re getting 20 hours’ pay. George is only getting a couple hours’ pay. Feel better now?

• I think this whole thing is stupid. The entire $9.5 billion should be used to fund nine desalinization plants along the California coast. How do I tell them to keep the money as I think this is a waste? I don’t think there’s a mechanism in place to not take the refund. But if it’s burning a hole in your pocket, hit the CVG Tip Jar at bit.ly/SupportCVG!

Donating to Charities Using a Qualified Charitable Distribution

If you are age 72 or older and have an Individual Retirement Account (IRA), you are required to take a “Required Minimum Distribution” (RMD) each year. The RMD is calculated by dividing your IRA account balance as of the last day of the previous year by a distribution period dictated by the IRS.

Distributions from IRAs (except Roth IRAs) are generally taxable income. And depending on your total income, the distribution may cause more of your Social Security benefits to be taxable.

Do you give to charities? One way to reduce the tax bite from RMDs is to give using a “Qualified Charitable Distribution” (QCD).

Using a QCD, you can give to your favorite charities directly from your IRA, up to an annual maximum of $100,000. Doing so helps meet your annual RMD requirement, while reducing your taxable RMD income. Yes, the amount of the QCD is excluded from taxable income.

Let’s look at an example.

Fred and Wilma Flintstone, who live in Bedrock, California, have an IRA with RMDs of $40,000 in 2021. Their only other income is $25,000 apiece in Social Security Income. They gave $5,000 to their favorite charities by writing checks and otherwise do not itemize deductions on their tax returns (their mortgage at 301 Cobblestone Way is full paid and thus no mortgage interest expense).

Based on the above, the Flintstones would owe taxes of $4,603 federal and $35 state on their 2021 tax returns.

Instead, if Fred and Wilma contributed to the charities using QCDs directly from their IRA, their tax liability would be $3,493 federal and nothing for the state. That would save them $1,145 in taxes! That’s a lot of Bronto Burgers!

The higher the tax bracket you’re in, the more these QCDs can save you in taxes.

Learn more about Qualified Charitable Distributions at www.irs.gov/publications/p590b#en_US_2020_publink100041439.

Completing the Free Application for Federal Student Aid (FAFSA)

To apply for federal student aid, such as federal grants, work-study, and loans, you, the student, need to complete the Free Application for Federal Student Aid (FAFSA).

In addition, many states and colleges use your FAFSA information to determine your eligibility for state and school aid, and some private financial aid providers may use your FAFSA information to determine whether you qualify for their aid.

The FAFSA is available in October of the year prior to the year you will be starting college in the fall, so high school seniors and their parents should be prepared to fill them out then.

You can complete and submit the FAFSA at fafsa.ed.gov. While our government encourages us to complete the FAFSA forms online, they still allow you the old fashioned option of completing a form and mailing it in. See studentaid.ed.gov/sa/fafsa/filling-out for a downloadable pdf.

Technically the FAFSA form is the student’s form, but if you are a dependent student, you will need information from your parents in the form. Here are the steps you need to take, and some (but not all) of the information required to fill out the FAFSA form.

1. Create a Federal Student Aid (FSA) ID, which is a user name and password you and your dependent student will use to complete the FAFSA form online. Both the student and the parent must create their own FSA IDs. Your FSA ID serves as your legal electronic signature, so be sure to keep it private like other passwords.

   When creating an FSA ID, keep in mind you cannot use an email address or mobile phone number with more than one FSA ID.

   Create your new FSA ID at fsaid.ed.gov/npas/index.htm.

   And just so you are aware ahead of time, your username must be 6 to 30 characters long and can be any combination of numbers and letters. The username is not case-sensitive. Your password must be 8 to 30 characters and contain at least one number, uppercase letter and lowercase letter. The password is case-sensitive.

2. Start the FAFSA form at fafsa.gov. You can start the process on behalf of your child. Be sure not to sign in at the same time as your child. You can create a “save key,” which is a temporary password that allows you and your child to alternative editing the form.

3. Fill in the Student Demographics section of the form, such as name, date of birth, etc. Be sure to use the same name as on the Social Security card – no nicknames.

4. Select the schools that you want the FAFSA information sent to.

5. Answer the dependency status questions. Answering yes to any of the questions means you will not have to provide parental information. For example, if you were born before January 1, 1999 or the 2022-2023 academic period, you are considered independent for FAFSA purposes. Or if you are married, are on active military duty, will be working on a master’s degree, etc., you are considered independent.

6. Fill out the parent demographics section – there is a series of questions here regarding your parents’ status that drive what information is required for the form.

7. Financial information must be provided. There is a link to the IRS Data Retrieval Tool (DRT) that allows you to import your tax information to the FAFSA form. Your child will also need to do this if he or she files taxes.

   In addition to your tax return(s), the FAFSA form will require information about untaxed income, such as child support received and interest income. You will also be asked to provide information about cash, bank balances, investments and business assets. Investments also include real estate held for sale (excluding principal residence), 529 college savings plans, etc. You do not need to include the value of 401k, IRA and other retirement plans.

8. Sign the form.

There’s a handy FAFSA worksheet for the 2022-2023 school year at studentaid.gov/sites/default/files/2022-23-fafsa-worksheet.pdf for those looking to review what is required in advance of completing the form.

Additionally, a pdf of the 10 page form (with notes) for the 2022-2023 academic year is at studentaid.gov/sites/default/files/2022-23-fafsa.pdf.

Eligibility for California Golden State Stimulus I and II Payments

A friend of mine who is in his 80s called me the other day asking if I knew why he received a check in the mail from the State of California. It was a check for $600 as part of the Golden State Stimulus II program. Here are the details.

Golden State Stimulus I Payments

First off, earlier in the year, many Californians received the Golden State Stimulus 1 payment, which was either $600 or $1200. Qualifications for GSS I were as follows:

• Must have filed your 2020 taxes,

• Must be either a CalEITC recipient or an ITIN filer who made $75,000 or less in California Adjusted Gross Income (AGI) in 2020.

  • A CalEITC (or California Earned Income Tax Credit) recipient is someone who in 2020 had California AGI of $30,000 or less and does not use the married filing separately filing status.

  • An ITIN (or Individual Taxpayer Identification Number) filer is a taxpayer who is not eligible to obtain a Social Security Number.

• Must have lived in California at least half of 2020 and are a California resident the date the payment is issued.

• Cannot be claimed as a dependent by another taxpayer.

GSS I recipients received $600 if they were either 1) an CalEITC recipient or 2) were an ITIN filer and made $75,000 or less in 2020 CA AGI (if filing jointly at least one taxpayer must use an ITIN).

GSS I recipients received $1,200 if they 1) were both a CalEITC recipient and an ITIN filer and made $75,000 CA AGI or less in 2020 or 2) filed a joint return, were CalEITC recipients, at least one was an ITIN filer and made $75,000 or less in 2020 CA AGI.

More information about GSS I on the Franchise Tax Board website at www.ftb.ca.gov/about-ftb/newsroom/golden-state-stimulus/gss-i.html.

Golden State Stimulus II

The state expanded the program and started paying out additional stimulus payments in October, continuing through mid-January. The amount of these payments is either $500, $600, $1,000 or $1,100. Qualifications for GSS II are as follows:

• Must have filed your 2020 tax return by October 15, 2021.

• Have CA AGI of $1 to $75,000 and wages of $0 to $75,000 in 2020.

• Must have lived in California at least half of 2020 and are a California resident the date the payment is issued.

• Cannot be claimed as a dependent by another taxpayer.

Here’s what you get if you qualify and have a SSN:

• $500 if you also qualified for GSS I and claimed a credit for 1 or more dependents.

• $600 if you did not qualify for GSS I and did not claim any dependents.

• $1,100 if you did not qualify for GSS I and claimed 1 or more dependents.

• $0 if you qualified for GSS I and did not claim any dependents.

Here’s what you get if you qualify and have an ITIN:

• $1,000 if you did qualify for GSS I and claimed 1 or more dependents.

• $0 if you did qualify for GSS I but did not claim and dependents.

More information about GSS II on the FTB website at www.ftb.ca.gov/about-ftb/newsroom/golden-state-stimulus/gss-ii.html.

Federal Tax Credits for Installing Qualified Solar Electric Systems

Photo credit: Pixabay

The federal Residential Energy Efficient Property credit allows for a tax credit on the installation of residential solar electric and solar water heating systems.

As of November 2021, the credit is 26% of the cost for systems put in place during 2021 and 2022 and 22% of the cost if installed in 2023. Currently, the credit expires after December 31, 2023, but that could be changed by legislation. Previously (2019) the credit was 30%.

The tax credit is claimed on federal Form 5695 “Residential Energy Credits.” If the amount of the credit exceeds your tax liability in the year your claim the credit, the excess of the credit gets carried forward to the following tax year. You can continue carrying forward the credit until you use it - there is no expiration.

The state of California does not have a corresponding solar energy credit.

Keep in mind that the tax credit is available only if you purchase the system. You cannot receive the credit if you lease your system. You can certainly finance the purchase of your system, however.

The cost of the system that you claim for tax credit can include the cost of a battery, as long as 100% of its power is derived from your solar system.

Can you include the cost of a new roof as part of your system? Generally no. The roof is not part of the system, unless you are installing solar roofing tiles or solar roofing shingles - those actually do qualify for the credit.

Learn more about Residential Energy Credits on Form 5695 at www.irs.gov/pub/irs-pdf/i5695.pdf or on the Energy.gov website at www.energy.gov/eere/solar/homeowners-guide-federal-tax-credit-solar-photovoltaics.

All About the Advance Child Tax Credits That Commenced Today, July 15, 2021

Today, the IRS started sending out “Advance Child Tax Credits” to eligible taxpayers for 2021 that were voted into law as part of the American Rescue Plan Act in March.

The law did a number of things for the 2021 tax year only:

• It increased the amount of the Child Tax Credit from $2,000 for dependents under age 17 to $3,600 for ages 5 and under and $3,000 for ages 17 and under.

  • Dependents age 18 and up continue to generate a $500 tax credit, with no advance credit.

  • Note that in prior years, the credit dropped from $2,000 to $500 at age 17, not age 18. So effectively the Child Tax Credit for dependents age 17 increased from $500 to $3,000 for year 2021, which is quite substantial.

  • The ages are determined as of 12/31/21.

• The law allows for Advance Child Tax Credit payments to taxpayers over a 6 month period beginning July 15 through December 15, 2021. The advance payments are as follows:

  • Up to $1,800 of the $3,600 tax credit for ages 5 and under at a rate of $300 per month, beginning July 15th.

  • Up to $1,500 of the $3,000 tax credit for ages 6 to 17 at a rate of $250 per month, beginning July 15th.

  • The remaining 50% of the tax credit will be applied as usual when you file your 2021 tax return in 2022.

• However, there is a “first phaseout” of the increased Child Tax Credit in 2021 once your 2021 modified Adjusted Gross Income (AGI) reaches $150,000 for married filing joint, $112,500 for head of household and $75,000 for single filers.

  • This first phaseout begins to reduce the Child Tax Credit from $3,000 or $3,600 down to $2,000.

  • The reduction is $50 of tax credit for each $1,000 in AGI in excess of the limits shown above. That means the Child Tax Credit drops to $2,000 if your income is $30,000 (ages 6 to 17) or $36,000 (ages 5 and under) greater than the limits.

• There’s also a “second phaseout” if your income reaches $400,000 married filing joint or $200,000 for other filing statuses as there has been in prior years.

Isn’t this great how uncomplicated the rules are? <sarcasm>

How do they determine if you will be receiving the Advance Child Tax Credit? Based on your 2020, or if not filed yet, your 2019 tax return.

The IRS will be sending out “Letter 6419” next January to show the total amount of Advance Child Tax Credits paid. They will need to be included in your 2021 tax returns to derive any remaining Child Tax Credit.

The Advance Child Tax Credits are not taxable income. HOWEVER, if your tax situation changes significantly in 2021 and as a result you are not eligible for the full Child Tax Credit, but you receive the Advance Child Tax Credits, you may have to pay back some of the money when you file the return. For example:

• Your income increased in 2021 and you are no longer eligible for the increased tax credit.

• You no longer claim the dependent for whatever reason.

If you think you are in this situation, you can OPT OUT of receiving the Advance Child Tax Credits at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

• You cannot opt out of payments already received, but you can opt out of future payments.

Inversely, your tax situation may have changed in 2021 that would allow you to receive more Advance Child Tax Credits:

• You had a baby in 2021 or otherwise have additional dependents under age 18.

• Your AGI dropped in 2021 and as a result you are now eligible for Child Tax Credits based on your reduced income.

• Your tax filing status changed in 2021 (single to married, or vice versa) and that changes your eligibility for Child Tax Credits.

Goldstein Weiss, CPAs www.goldsteinweiss.com 818-876-8380

Go to the link above to update your information with the IRS to start receiving Advance Child Tax Credits.

Free Online Tax Filing Options for Federal and State Income Taxes

There are a number of online resources to enable those with relatively simple tax returns to file for free. Generally these options cover those with W-2 income, some interest/dividends, kids and rent. What they don’t cover are itemized deductions, Schedule C (for self-employed individuals claiming business expenses), stock gains/losses, etc. Here are some options:

Free 1040 Tax Return: Free federal/state returns if your Adjusted Gross Income (AGI) is $69,000 or less and you are 70 or younger. www.fileyourtaxes.com/irs-free-file

H&R Block offers free federal/state returns for AGI $69,000 or less and age 17 to 51. www.hrblock.com/online-tax-filing/free-online-tax-filing

TurboTax offers free federal/state tax prep if your AGI is $36K or less and any age or meet other criteria summed up at freefile.intuit.com.

TaxAct allows for a free federal/state return if your AGI is $59,000 or less and you are age 56 or younger. www.taxact.com

Credit Karma offers free federal/state tax filing. You must sign up for a free Credit Karma account to do so. www.creditkarma.com/tax

In 2019, the IRS reports that a total of 154 million individual income tax forms were filed in the United States, including 137 million filed electronically.