Monday, July 28, 2008


There are three (3) things that we know about the current economic “stimulus” rebate -

(1) Part or all of your payment can be used to offset past-due federal or state income taxes or non-tax federal debt such as student loans and child support.

(2) The rebate currently being issued is an advance on a special credit on your 2008 federal income tax return. It is calculated based on the information on your 2007 Form 1040 (or 1040A). You will reconcile your advance to your 2008 information on the 2008 Form 1040. If your situation has changed and you are entitled to a rebate that is greater than the amount you already received you can claim the additional amount on your 2008 tax return. If you got more then you are entitled to you do not have to pay back the difference.

(3) You must file by October 15, 2008 in order to get your advance payment this year.

Consider this situation -

John Q Taxpayer owes “Sam” about $10,000 in back federal income taxes from 2001 through 2004. He has been current with his 1040 payments since 2005. If he files a 2007 federal income tax return by October 15th he will not receive a “stimulus” rebate check, as the entire amount of the rebate will be applied toward his outstanding tax debt. He also will not be able to claim the rebate amount on his 2008 Form 1040 because technically he received the advance.

What if JQ filed a 2007 Form 4868 (Automatic Extension) in early April of 2008 and paid in full his anticipated federal income tax liability with the extension request. And what it JQ does not file his actual 2007 Form 1040 until December of 2008. Since he paid the entire 2007 tax liability in full with his extension there will be no penalty for late filing or late payment.

Because JQ filed his 2007 Form 1040 after October 15, 2008, he will not be eligible for an “advance” rebate.

When JQ files his 2008 Form 1040 he indicates that he is entitled to a $600 rebate, but did not receive an advance payment in 2008. The reason he did not receive an advance payment was not because the money was taken to pay back taxes. Because he submitted his 2007 income tax return after October 15th no advance payment was processed.

Will JQ be able to apply his $600 rebate against his 2008 tax liability on the 2008 Form 1040? Say his 2008 tax liability is $2,000 and he has $1,300 in federal income tax paid in either via withholding or estimated tax payments. Can JQ add the $600 rebate for which he qualifies, and which he did not receive as an advance in 2008, to the $1,300 in payments and only need to send “Sam” $100 when he files the 2008 Form 1040 in early 2009?

By following this strategy will JQ be able to avoid having his $600 rebate taken to offset past tax debts and be able to reduce his 2009 “out of pocket” payments for 2008 federal income taxes by the amount of the rebate if he wants to remain “current” with his 1040 filings?

Now what if JQ’s $2,000 tax liability for 2008 represents self-employment tax only? He is able to wipe out any federal income tax liability via deductions and credits. Will the amount of his rebate be applied toward self-employment tax liability? Remember, this rebate is very different from the one issued in 2001. This rebate is not an advance on a future income tax savings – but an out and out gift from the government.

So what do you think?



Anonymous said...

I am supposed to be on vacation but everyone is still sleeping. Anyway, from my research on the "gift" credit, JQ Will be able to apply his $600 rebate against his 2008 tax liability on the 2008 Form 1040 in early2009. The second question should be a “yes” based on the information available.
This next one is a bit tougher, if JQ has paid his past due (2001 -2004) in full as of December of 2007 and is current in all taxes due by this point (as he has kept up since 2005), given the numbers, “SAM” only gets $100 out of our JQ Taxpayer.
From what I understand, the rebate won’t be applied toward self-employment tax liability, the last section. However I think more research on this might be in order. At least on my part.

Robert D Flach said...


What are you doing reading tax blogs on vacation!?!

The point is that JQ did not pay his 2001-2004 past due IRS balance by December 2007. He is purposely attempting this "strategy" to avoid having his rebate withheld to apply toward this balance due.

Actually JQ is waiting to accumulate some funds so he can submit an Offer In Compromise to pay $5,000+ to satisfy his $10,000+ and growing debt.

Enjoy your vacation!