Saturday, April 19, 2008


Here is an update on George W’s “stimulus” election-year bribe.

The Economic Stimulus Act of 2008 provides for a special “credit” on your 2008 income tax return. The rebate checks that will begin to be mailed out in May are an advance on this 2008 tax credit based on the information reported on your 2007 federal income tax return.

I must point out that the rebate check is not an advance on a 2008 tax reduction, as was the case the last time Congress issued rebate checks. It is a direct credit from the government and comes out of the budget and not a future refund. These rebate checks will increase the federal deficit by billions of dollars.

The amount of the rebate check is based on “qualified income”, tax liability, dependent children under age 17, and Adjusted Gross Income.

The minimum rebate is $300.00 and the maximum rebate is $600.00 per taxpayer, with an additional maximum of $300.00 per dependent child under age 17. A married couple who qualifies for the maximum will receive $1,200.00. I married couple with 3 dependent children – one age 10, one age 16, and one age 18 – will receive $1,800.00.

You must file a 2007 tax return – form 1040A or 1040 – in order to receive a rebate check. If you normally would not have to file a return because your income was under the filing threshold and you had no income tax withheld you must file one for 2007 to get a rebate check. A taxpayer whose only income is Social Security must file a 2007 federal income tax return to get a rebate check.

A dependent, regardless of age, who files a tax return will not receive a rebate.

To get the rebate you must have at least $3,000.00 in “qualified income”. Qualified income is earned income, such as W-2 wages and net earnings from self-employment, and Social Security, Railroad Retirement or Veteran’s disability and survivor benefits.

Non-taxable combat pay is included in qualified income.

The rebate is limited by tax liability. If you have sufficient qualified income but a “0” tax liability you will receive $300.00. If you have qualified income and a $437.00 tax liability you will receive $437.00. If you have qualified income and a $1,000 tax liability you will receive $600.00.

The Child Tax Credit is not counted when determining net tax liability for purposes of calculating the rebate amount, although other tax credits are.

Because the rebate amount is based on tax liability, a couple with no earned income but at least $3,000.00 in Social Security who have a tax liability in excess of $1,200.00 will receive the full $1,200.00 rebate. A retired couple with at least $3,000.00 in Social Security benefits but a “0” tax liability will receive $600.00.

The amount of the rebate check will be reduced, and ultimately phased-out, if your Adjusted Gross Income (AGI) exceeds $75,000 for an individual and $150,000 for married couples filing a joint return.

The rebate is reduced by 5% of the amount that your AGI exceeds these threshold amounts. For example, an individual with qualifying income and a tax liability in excess of $600 who has an AGI of $79,600 will receive $370.00 ($600.00 less $4,600 x 5%).

The basic rebate is totally phased-out at AGI of $87,000 for individuals and $174,000 for joint filers. However if dependent children under age 17 are included in the rebate than these amounts will be larger.

As I mentioned in the beginning the credit for which the advance rebate is issued is on your 2008 tax return. While the advance is based on 2007 tax return information, the actual credit is based on 2008 information.

When you file your 2008 federal income tax return you will calculate the credit based on 2008 information and subtract the amount of the rebate check that you have received. Since the amount of your 2008 qualified income, the number of dependents under age 17, your Adjusted Gross Income, and/or tax liability before the Child Tax Credit may be different from 2007 you could actually receive an additional rebate on your 2008 return.

Let us say as a married couple you receive a $1,073.00 rebate check this May. However, when you file your 2008 tax return the actual credit you are entitled to is $1,500.00. You will receive an additional $437.00 on your 2008 return, which will increase your 2008 refund or reduce your 2008 balance due.

If it is the other way around and you got a $1,500.00 rebate check in May of 2007 but are only entitled to a $1,073.00 credit on your 2008 Form 1040 you get to keep the $437.00 overpayment! You will not have to pay this amount back on your 2008 tax return. As that Russian comic would say – “What a country!”

The last set of rebate checks resulted in over 8 Million errors on 2001 tax returns. I will bet you that this new rebate will beat that number.

The IRS has an excellent
Economic Stimulus Payment Calculator on its website. You can use this to determine the amount of your check.

The first set of rebate checks will be going out in May. These will be for individuals who filed their 2007 federal income tax return by the April 15th initial deadline. Those who file an extension will receive their checks later in the year. Click here to see the Stimulus Payment Schedule.
If you requested direct deposit of your Form 1040 refund your rebate check will also be directly deposited to the same account.

Rebates will not be issued to non-resident aliens. You must have a valid Social Security number to receive a rebate.

When you receive your rebate check do not rush out and buy something you don’t need. Use it to pay down your credit card balance or to invest. How about depositing it in a ROTH IRA for 2008? Or opening a dividend reinvestment account with IBM, GE or a utility stock?

You should be on the alert for tax rebate scams such as telephone calls or emails claiming to be from the IRS that ask for specific sensitive financial information. The IRS will not call or email taxpayers about these payments nor will it ask for specific financial information!

While we are on the subject here is a related item of interest - The IRS couldn’t afford to send out the 2008 estimated tax payment vouchers and envelopes this year – but they could waste millions elsewhere. TAX GIRL tells us where in her post “Why Didn’t IRS Just Buy Super Bowl Commercials?”.

So, any questions about the “stimulus” rebates?

Fellow tax bloggers – did I miss or “mis-state” anything?


1 comment:

Tim said...

Personally I'm looking forward to the stimulus check. My wife and I were planning on taking a small vacation this summer anyways, so this check makes that vacation nearly free. What is the net result to me then? More money stays in my high interest savings account! It definitely will not be increasing my spending outside of anything I did not already have planned and budgeted for.