IRS Will Not Tax Grants for New Septic Systems

The Internal Revenue Service announced Friday that it will no longer count grants and rebates homeowners receive from Suffolk County and East End towns for new innovative septic systems as taxable income, paving the way for greater public interest in the program, which to date has wreaked havoc on household income taxes for people who participate.

In 2018, Suffolk County Comptroller John Kennedy began issuing IRS 1099 forms to people who received the grants, which in some cases has had dramatic tax impacts on people who volunteer to upgrade their septic systems.

Other lawmakers and environmentalists have been working since to get the IRS to rule on whether these grants should be taxed as income.

“This program is designed to make investments to protect water quality for us all. Not a dime of it should be taxed,” said Suffolk County Executive Steve Bellone at a press conference his office held this year on Tax Day, April 18, on the front lawn of an Islip homeowner who was facing taxation.

Mr. Bellone said he’s heard stories of people whose tax bills have gone up by as much as $8,000, or who have ended up in a higher tax bracket, jeopardizing their Social Security income and their ability to receive college financial aid for their children. “Residents who voluntarily participated in this program to protect and improve water quality are being punished.”

The new septic systems can cost in excess of $40,000, and Suffolk County has provided grants of up to $30,000 to homeowners who install them, while Southampton and East Hampton towns also have rebate programs for homeowners who install the systems. To date, these homeowners have had to fill out IRS W9 forms when accepting the grants and rebates, in anticipation of receiving 1099 tax forms to be filed with their taxes.

In its ruling Friday, the IRS noted that IRS rules state that “any program of a state or a political subdivision of a state under which payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife” should not be included in that person’s gross income.

U.S. Senator Chuck Schumer announced Nov. 22 that the U.S. Department of Agriculture had ruled that Suffolk taxpayers should not receive these 1099s, and said he expected the IRS to quickly echo that ruling.

“It’s not the septic systems that are clogging up progress here in Suffolk, it’s the federal bureaucracy, and we are here to support homeowners who are doing their part to help reduce nitrogen pollution and prevent them from being ‘double taxed.,’” said Mr. Schumer at a Nov. 22 press conference at the home of a homeowner whose septic system had been taxed. “Look, when something is a win for homeowners and Long Island’s environment, the feds should do all they can to make it work, and that is why I am calling on the IRS to do what the USDA just did and green light the SIP’s tax exemption and accept their determination.”

Mr. Schumer said the county had received 3,583 applications for grants for the new septic systems to date, and 1,277 homeowners had installed the systems.

“This decision from the IRS is the correct and just policy, and is a huge victory for Suffolk County taxpayers. Saddling Long Islanders with an unexpected bill come tax season was always unacceptable,” said East End Congressman Lee Zeldin. “The federal government should never be shooting from the hip when it comes to hard-earned tax dollars. I am proud of our efforts with the IRS, Suffolk County and across all levels to find a workable solution to resolve this situation.”

“Our septic improvement program is critical to protecting and improving our water quality on Long Island,” said Suffolk County Executive Steve Bellone. “Today’s announcement is a major win for both Suffolk County taxpayers and our environment.”

The IRS stated that people who had already paid taxes on the grants “should file an amended return Form 1040 X for the year or years in which they reported the income and decrease their adjusted gross income by the appropriate amount.” Here are more details.