PHOENIX — The IRS will tax a state tax rebate that was given to more than 740,000 families in 2023 to help with inflation costs, the Arizona Department of Revenue says.
The child tax rebate was written into the 2023 state budget and was heavily pushed by Republicans. Democratic Governor Katie Hobbs signed the budget into law, saying she agreed with the tax rebate.
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But now, the Department of Revenue said it's been told the IRS will classify the rebate as taxable income, forcing those families to pay taxes on money that many likely thought was free and clear.
"We haven't heard the rationale," Senate President Warren Petersen (R-Gilbert) said. "It doesn't make sense."
Petersen, who supported the rebate, said other states had similar tax rebates in 2022 and were not considered taxable by the IRS, so he thought this rebate would be free of taxes as well.
"Why on earth would you be taxed on a tax rebate?" Peterson said.
A spokesman for Arizona Attorney General Kris Mayes said the AG's office is looking into it. A spokesman for Governor Katie Hobbs did not return a request for comment.
The Department of Revenue said the rebate will be more complicated than just paying the IRS more money.
"Taxpayers will need a 1099-MISC," spokesperson Rebecca Wilder said.
But the Department of Revenue will not send that out to taxpayers, Wilder said. Instead, they'll have to go to AZTaxes.gov and get the form that way.
Wilder said the link to get the required form will not be available until Jan. 31 at the earliest.
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