It is no secret that California is in and has been under drought conditions for an extended period of time. Abnormally dry and drought conditions were first declared in the state back in 2012. By 2013, most of the state was under some form of an advisory with much of Southern California in severe drought. In 2014 and 2015 extreme and exceptional drought conditions emerge and expanded across the state. The severity and duration of this still ongoing drought has led to breathless, but not entirely impossible, predictions of a potential 200-year drought. In light of such facts, state officials in California have called upon people to do all they can to conserve water including making improvements to property to save water.
State officials and public utility companies have enacted a number of programs to help Californians save water. This includes a tax rebate intended to encourage home owners to tear out their lawns requiring extensive watering to install more climate-appropriate landscaping. However, the $340 million dollar program run by Metropolitan Water District of Southern California appears to have unintended tax consequences for many of the home owners who received the rebate they received.
Los Angeles Times Profiles the Tax Worries of One Pasadena Home Owner
In a recent feature in the Los Angeles Times, the struggle of a homeowner who attempted to be socially, fiscally, and environmentally responsible is profiled. Tina House may have spent months calculating and computing the advantages and drawbacks of taking the rebate and replacing her landscaping, but she – like others – did not consider potential tax implications.
She calculated that shutting off her sprinklers would save roughly $40 a month. But, located in the corner unit of an immaculately landscaped and maintained neighborhood she did not want to annoy her neighbors or harm property values. Unfortunately replacing the grass in the yard with something less water-intensive would cost several thousand dollars. Thus, when she was offered a $4,210 rebate by the water company to handle the project, she jumped at this chance to modify her yard to be more drought-friendly while being a good neighbor.
While many people like Ms. House performed extensive calculations regarding the cost savings and amount of time required to recoup the investment, few considered the potential tax implications of such a rebate.
California Provides a Turf Removal Tax Rebates, but the Federal Government Does Not
California’s state government recognizes the importance of conserving water and has authorized special tax treatment in the form of an exemption for turf removal rebates. Unfortunately the federal government’s tax policy has been less forward-thinking. That is, the federal government does not appear to permit tax rebates for water-saving measures. The U.S. Tax Code only provides tax exemptions for rebates that are related to improving energy efficiency.
California’s State Franchise Tax Board has asked the IRS to clarify its position on this matter potentially affecting the roughly 60,000 taxpayer homeowners who took the rebate. The FTB has stated that it would support an exemption for these purposes. The water company has stated that it is hopefully that FTB can negotiate a deal with the IRS.
However, the company is already taking steps to prepare for the potential that the IRS will determine that these rebates do not qualify for the exemption and should be counted as taxable income. Businesses that received greater than a $600 rebate check have already received a 1099 showing their rebate income. If the IRS determines that this income is not eligible and will be counted as income, homeowners will also begin receiving 1099s showing their income. In light of the average rebate of about $3,000 most would take a hit, but not a catastrophic one. For some home owners who received rebates of more than $70,000 such a decision would impose an extreme tax burden on people who were simply trying to be good citizens and environmental stewards. While a decision is still pending, taxpayers should prepare themselves for the potential of facing a significant tax liability.
Tax Issues Due to Unforeseen Tax Burdens?
If complications concerning a tax exemption or tax rebate has thrown your finances into disarray, the Hoffman Law Offices can help. We can looking into an offer-in-compromise or other relief measures for your tax situation. To schedule a free and confidential initial consultation call the firm at 800-897-3915 or contact us online today.