Federal Legislation Would Stop Taxation of Septic Rebate Grant Money

A new bill floated in the U.S. House of Representatives in June would overturn an Internal Revenue Service ruling that found that innovative/alternative septic system grant recipients must pay income taxes on the grant proceeds.

The IRS issued a ruling letter in January at the request of Suffolk County Comptroller John Kennedy, who had been criticized for sending 1099 tax forms to county residents who took part in the Suffolk County Reclaim Our Water Initiative by replacing their outdated septic systems with nitrogen-reducing systems, in an effort to improve water quality in bays and ponds. Participants applied for up to $30,000 from Suffolk County and New York State, and East Hampton and Southampton towns offered grant money as well. With the grants being treated as income, participants were confronted with thousands of dollars in federal tax liability.

Democratic U.S. Representative Tom Suozzi, who represents much of the North Shore of Long Island, sponsored the legislation, which he introduced on Thursday, June 18. U.S. Representatives Lee Zeldin and Peter King, both Long Island Republicans, signed on to co-sponsor.

“When it comes to hardworking Long Islanders’ taxes, there has been too much shooting from the hip. We must protect these taxpayers, and this complex issue requires an effective solution,” Mr. Zeldin said in a statement. “This program’s goals are laudable, but we must ensure people can actually use the program to achieve those goals. While all levels of government work to find a solution, due to the urgency of this situation, we are running the gamut on every option, including this legislation to provide immediate relief.”

The bill revises IRS code and would exclude from a taxpayer’s gross income any subsidy for a wastewater management measure at the taxpayer’s principal residence. If adopted, the legislation would apply to 2020 and future grants and also be retroactive to 2019 tax returns.

Mr. Suozzi’s bill has been referred to the House Ways and Means Committee. According to Mr. Suozzi’s office, the measure will be included in an infrastructure package that the House will vote on in the coming weeks.

“Cesspools and septic systems have been identified as the largest single cause of degraded water quality On Long Island,” Mr. Suozzi said in a statement. “This bill may not sound exciting, but it has a real impact on real people’s lives and pocketbooks. It will reverse the IRS’s wrongheaded decision, as well as help protect our environment, groundwater, and our bays and harbors without putting any additional onus on homeowners.”

Suffolk County Executive Steve Bellone added: “The notion that Suffolk County homeowners would be taxed for participating in a water quality program that will make their water cleaner simply defies all logic. We launched the most ambitious septic improvement program in the State to make it affordable for homeowners to replace their outdated septic systems and cesspools to help solve the water quality crisis. I want to thank Congressman Suozzi for introducing this commonsense legislation that would prevent the IRS from taxing homeowners who want to do their part to help protect our environment.”