During a water crisis in California, the state and local governments ran a program for residents, offering rebates to people who replaced their lawns and landscaping with plants that can survive drought conditions and don’t require constant watering. Now people who received rebates are getting a surprise in the mail: they’ve received letters saying that they have to pay federal taxes on that money.

People working for the program had assumed that the rebates they issued were the same as government rebates for energy conservation, which are exempt from taxes. However, the problem is that water conservation rebates aren’t specifically named in the tax code, making them taxable. Employees didn’t know this, so they didn’t warn rebate applicants.

“This is one of those issues where it was long established that these weren’t taxable,” a representative of the program explained to CBS Sacramento’s Kurtis Ming. “Government rebates have never been taxable.”

Since the money came from state taxpayers, rebate recipients and people working for the state rebate program alike think that taxing it is unfair. Rebates of $600 and above triggered reports to the IRS.

“[W]e’re being penalized for being good citizens,” complained one man who re-landscaped his yard because of the promise of a rebate to help cover the expense.

Call Kurtis Investigates: IRS Wants to Tax Rebates Sent to Water Conserving Californians [CBS Sacramento]

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