There might be a way to avoid federal income taxes on the Alaska Permanent Fund dividend. But it would mean admitting that the annual payment to Alaskans is a political decision not at all tied to earnings of the savings account.
It could mean changing the name of the PFD to Popular Fall Distribution, to truly disassociate the money from the fund’s investment earnings. If it means avoiding federal income tax on the money, we could learn to call the annual payment most anything.
It would mean changing state law.
And it would mean discarding the cynical belief that Alaskans only care about the Permanent Fund because they get a slice of the earnings every fall.
Regardless of the name, we would still want and need to love the Permanent Fund since it provides the largest single source of consistent revenue for public services. That would not change.
Don’t think of it as a full divorce from the dividend, just think of it as cohabitation without the legal encumbrances.
The possibility of a tax-free PFD struck me after reading last week’s IRS announcement that “general welfare” payments handed out by 21 states in 2022 are not considered taxable income. Those payments were intended to help ease the financial stress of high energy prices, painfully high inflation, the lingering effects of the pandemic, essentially most anything that helped residents get by in life.
No needs-based test to get the money in the 21 states. It went to everyone, thus the cash fit under the IRS use of the general welfare doctrine.
It’s the same reason why the billions of dollars in federal pandemic relief payments to individuals in 2020 and 2021 were not taxed. Everyone received the money to help with their general welfare. Who says the tax code is cold and cruel.
In Alaska, the IRS said the $662 slice of last fall’s $3,284 dividend is not taxable, since it was designated by the Legislature as energy relief, whereas the $2,622 dividend portion is taxable since it is intended as each Alaskan’s share of the fund’s investment earnings.
So why not take the hint from the federal tax office and change state law to make the entire fall bonus tax-free? Figuring the average Alaskan is in a 20% tax bracket, that could mean around a quarter-billion dollars a year that would stay in Alaskans’ pockets instead of going to the federal treasury under a $2,000 PFD.
The Journal of Accountancy — perfect bedtime reading for people who can’t sleep — describes it this way: “The IRS has consistently concluded that payments to individuals by government units, under legislatively provided social benefit programs, for the promotion of the general welfare, are not includible in a recipient’s gross income.”
The Alaska Supreme Court in 2017 ruled that the amount of the PFD is nothing special under the law, merely a distribution of state general fund dollars and subject to the same legislative appropriation process as any other budget item, such as schools or troopers or road repairs.
Sure sounds like that could meet the IRS test of a government payment with a social benefit and for the promotion of general welfare. All we need to do is change the law to admit that the PFD is a state program intended to benefit Alaskans, unrelated to what the Permanent Fund may earn on its stocks, bonds, real estate and other investments that year, and subject to the annual political appropriation process.
It’s not really that hard to admit the truth.
Reader Comments(0)