Federal Judge Rules Arizona Family Rebate Is Taxable, Denies Attorney General's Request

Arizonans who received the state's family rebate last year should plan to report it as taxable income on their federal returns, due next week. A federal court ruling issued on 2024-04-09 leaves little room for an exemption for now, although taxpayers could eventually recover the money.

U.S. District Court Judge Murray Snow rejected a request from state Attorney General Kris Mayes for an immediate declaration that the payments, worth up to $750 per family, are exempt under Internal Revenue Service rules. The rebate program returned about $260 million to roughly 750,000 Arizonans.

In his reading of the IRS regulations, Snow concluded that the rebate does not qualify for the exemptions from federal taxation. He noted that tax-free treatment applies to "legislatively provided social benefit programs for the promotion of the general welfare." According to the judge, that standard generally means payments should be tied to the need of the individual or family receiving them.

Arizona's program did not work that way. Republican lawmakers designed the measure to send money to anyone with dependents, regardless of how much they earned. The rebate law also required that recipients had paid at least $1 in state income taxes in prior years. That condition excluded people whose incomes were so low that they owed the state nothing.

Snow went on to say that even if he had accepted the state's arguments, a larger legal obstacle remained. Federal law bars courts from issuing injunctions that tell the government it cannot collect a tax, which is what Mayes had sought.

Under that framework, the judge explained, courts may only weigh the legality of a tax after it has been collected and paid. At that stage, individuals who can show they are not subject to the levy are able to apply for a refund.

"The court, therefore, believes it unlikely that is has jurisdiction to hear this particular claim wholly apart from whether the state has met its burden to receive a preliminary injunction," Snow wrote.

A spokesman for Mayes said that although she was unable to obtain a ruling to immediately stop the IRS from collecting the tax, she intends to keep pursuing the case. If she prevails, affected taxpayers could become entitled to seek refunds of the tax they pay on the rebate.