March 2008

TAX LAW SPECIAL REPORT

March 2008

WHAT'S THE DEAL WITH THE INCOME

TAX "REBATE" WE HAVE HEARD

SO MUCH ABOUT?

By Nathan Hannah

Most news accounts about the tax “rebate” checks to be issued by the federal government have been very short on details about how the whole scheme will work. The IRS recently sent a postcard, titled “Economic Stimulus Payment Notice,” that gave a little more explanation, but probably served mostly to get people excited, thinking that their check was on the way. Anything from the IRS that says in red capital letters on the front “ENCLOSED IS AN IMPORTANT MESSAGE FROM THE IRS ON THE ECONOMIC STIMULUS ACT OF 2008 DO NOT THROW AWAY!” will certainly get my attention. Alas, the notice says the IRS will start sending the “one-time payments” in May (too late to help you with this year’s return).

The letter below, which is a shortened version of one published in the RIA e-newsletter “Newsstand” of February 15, 2008, gives a good, concise explanation of how the scheme works, plus some of the details that tax enthusiasts like me (I won’t be so presumptuous as to call myself a “tax geek”) were looking for but not finding even in business-oriented news reports:

Dear Client,

You've probably heard that the government is going to be sending rebate checks to most Americans in an effort to stimulate the economy. This letter explains, among other items, who gets rebates, how they are calculated, how higher income can reduce or eliminate a rebate, and what, if anything extra, you'll need to do to get one.

Who gets rebates? Only individuals get rebates. Business entities don't get them. Nor do estates and trusts. But there are other new tax breaks for businesses. Not all individuals, however, get rebates. You don't get one if you are or can be claimed as someone else's dependent. Also, nonresident aliens don't get rebates.

To get a rebate, in general, for 2007, you must either (1) owe tax as computed in a special way or (2) have at least $3,000 of qualifying income—earned income generally, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

How much do you get? A single person with no qualifying children gets a maximum rebate of $600 or a minimum rebate of $300. A married couple filing jointly with no qualifying children gets a maximum rebate of $1,200 or a minimum rebate of $600. To get the maximum, your 2007 tax (figured in a special way) must be $600 or more for a single person and $1,200 or more for a married couple filing jointly. To get the minimum, you must have at least $3,000 of qualifying income (explained above) or owe tax (figured in a special way) of at least $1. Your rebate amount will fall in between the minimum and maximum if your tax is more than $300 but less than the maximum rebate for your filing status. In that case, your rebate will be equal to your tax. For example, you are single and your tax is $500. You will get a rebate of $500.

Increased amount for those with one or more qualifying children. Anyone who qualifies for a rebate in any amount gets an additional $300 for each qualifying child. To qualify, a child must be under the age of 17, live with you for more than half of the year, and be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any such individual. In addition, the child must not have provided more than half of his or her own support. Thus, for example, a married couple filing jointly with two qualifying children could be eligible for a maximum rebate of $1,800.

How does higher income affect a potential rebate? The amount of the rebate (both the basic and the child's amount) is reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). For example, a married couple filing jointly with no children has AGI of $160,000, and net tax liability of over $1,200. Their rebate is $700: [$1,200 basic rebate − $500 phaseout (i.e., 5% × ($160,000 − $150,000)].

What do I have to do to get the rebate check? Nothing. The IRS will automatically figure your rebate based on your 2007 tax return that is due April 15, 2008. It will start sending rebate checks out in May for those who file before then.

…

Do rebates affect 2008 taxes? The rebate that the IRS will send you after you file your 2007 return usually won't affect your 2008 taxes on the return that you file in 2009. However, it can. When you do your 2008 taxes, you will figure what the rebate would have been based on your 2008 taxes. It could be higher or lower than the check that you received from the IRS in 2007. If it is higher, you will get a credit against your 2008 taxes for the difference. It if is lower, you won't have to pay the difference back.

[Source: Federal Taxes Weekly Alert (preview) 02/21/2008, Volume 08, No. 54]

If nothing else, the “rebate” is an incentive to file your 2007 federal income tax return on time (if you qualify for a rebate, that is). It will result in yet another worksheet calculation that you’ll have to do for your 2008 return so that you can figure what the rebate would have been based on your 2008 tax, but at least you don’t have to do it until next year (and you’ll only have to do it once).

So, have you filed your tax return yet?

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