Call Kurtis Investigates: IRS Wants to Tax Rebates Sent to Water Conserving Californians | Congressman Ami Bera

Congressman Ami Bera

Representing the 7th District of California
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Call Kurtis Investigates: IRS Wants to Tax Rebates Sent to Water Conserving Californians

Jan 27, 2016
In The News

RANCHO MURIETA (CBS13) — Jumping at the state’s water rebate program, Alvin Somers ripped out his lawn, and put in drought resistant plants and woodchips. California’s Save our Water program rewarded him with a check for $1,300.

“The idea was terrific,” Somers said.

The State offered rebates of up to $2,000 to put in drought resistant landscaping. Several cities, including Sacramento and Los Angeles have similar programs.

But many who participated in the State’s program are getting surprised with a letter stating they may owe federal taxes on it. If your rebate was $600 or more, the letter reads, “We have been instructed by the Internal Revenue Services (IRS) that in order to comply with federal tax rules, you must… file a 1040 form registering your rebate for federal tax purposes.”

“I went crazy,” Somers recalls.

The 81-year-old says no one ever told him this rebate was taxable. We’ve learned there is a reason why.

“Frankly, it’s a real embarrassment,” said Richard Stapler who works for the Save Our Water Program.

Stapler says his agency did not think government rebates were taxable.

Kurtis: Did somebody drop the ball by not looking into this?

Stapler: This is one of those issues where it was long established that these weren’t taxable. Government rebates have never been taxable.

We examined federal tax code. It does state you are exempt from paying taxes on “Energy Conservation” rebates for your home. However, the tax code says nothing about water conservation rebates.

“Treating these rebates as income, is adding insult to injury,” said Jon Coupal of the Howard Jarvis Taxpayers Association.

He thinks the IRS could come up with regulation allowing these water rebates to be tax free.

By the way, we dug deeper to learn these tax rebates were actually paid for by the taxpayers when they approved Proposition 1.

“Does the IRS really think it’s fair to tax tax dollars?” Stapler asked. “We are really doing everything in our power to get the IRS to reverse their position in this.”

When we contacted the IRS, a spokesperson pointed us right back to the tax code and wouldn’t say much more.

Coupal suggested lawmakers in Washington, DC could also fix this.

“Congress could pass a law and solve this in a heartbeat,” he said.

We brought the issue to Rep. Ami Bera who represents Somers’ district.

“My office is working to clarify and fix this problem so that no residents face additional fees.” the Democrat said in an email. “The rebate is meant to encourage Californians to make smart changes to their home landscaping and it’s critical that the state follows through. Residents should not be punished for taking proactive steps to limit their water usage.”

For now, Somers is left in the lurch.
He says he wouldn’t have spent so much money ripping out his lawn if he knew he’d have to give Uncle Sam a cut of his rebate.

“Somebody missed the boat,” he said. “Now, we’re being penalized for being good citizens.”

The State says so far 2-thousand Californians have taken advantage of the Save our Water rebate program. About half received more than $600 which may be taxable.

The City of Sacramento’s River Friendly-Landscape rebate program  has $1.1 Million budgeted .

So far 343 applications have been processed according to a city spokesperson, with $127-thousand paid out. The city has sent out 1099s to 69 people.

Unlike the state, the city says it warned applicants they may be taxed.