One of my friends coined my current nickname, the “Messenger of Doom.” It had to do with a year where he made a lot money, and then I gave him the bad news that he had only made about half that after taxes (including state and local taxes). He wasn’t happy, but I’m not the individual who made him move from South Dakota (which has no income tax) to New York City (which had, at the time, the highest income tax rate in the country). But I digress….
To my correspondents: I’m just the messenger. The US Tax Code is, at its heart, amazingly simple: Everything is taxable unless Congress has exempted it; nothing is deductible unless Congress allows it. Congress has not exempted turf rebates from taxation.
“But Russ, rebates are tax exempt.” True rebates are a refund of money you get from the seller of a product. A good example is an automobile rebate. You buy a new car, and the dealer gives you back $500. That’s a rebate. Turf rebates are nothing like that. You’re purchasing some sort of xeriscape and removing your lawn. That’s done through a landscaper (or others). Meanwhile, the water district is giving you money because of this. Yes, the two actions are tied together but the “rebate” isn’t coming from the company you’re buying from. It’s not a rebate in the tax definition of a rebate.
In tax, it’s substance over form. The Metropolitan Water District is free to call this a rebate (we do live in a free country), but in tax substance this isn’t a rebate. The money you’re getting is taxable income.
“But Russ, California has exempted rebates, and for California purposes they are rebates.” No argument: California has exempted this from state taxation. California is free to exempt anything it wishes from state taxes; Congress is free to exempt anything it wishes from federal taxation. There are numerous differences between California taxes and federal taxes. For example, California lottery winnings are taxable to the United States but not taxable to California. Unemployment compensation is taxable to the IRS but not the Franchise Tax Board. On the other hand, the Section 179 deduction is limited to $25,000 for California purposes but is $500,000 federally. You can have a deduction for contributions to HSAs on the federal level but not California. I could go on and on about the differences.
“But Russ, shouldn’t the water agencies have known these rebates were taxable?” That’s an excellent question. Had they consulted with their tax advisors, they should have reached the same conclusion I quickly did. There’s clearly some error here, and I definitely think that people should have been told the rebates were taxable on the federal level.
“But Russ, this is unfair!” I hate to tell you, but life isn’t fair. If you think this is wrong, contact your Congresscritters and Senators. The only way that turf rebates will become tax exempt is if Congress passes a new law. I’m just the messenger here.