Where's My Rebate Check?
Who Gets How Much When?
By: Terry Myers and Dee DeScherer
Call them stimulus payments or call them tax rebate checks, your clients will be asking you questions, starting with when they can expect their money. Here are answers to common questions around the checks, as spelled out in the Economic Stimulus Act of 2008 and subsequent IRS guidance. Tax return preparers are already getting questions from clients about the newly enacted tax law, formally known as the Economic Stimulus Act of 2008 (ESA) [P.L. 110-185]. And, of course, a big share of the questions deal with the rebate checks that will be going out to more than 130 million individuals. Below you will find answers to some of the more common rebate questions you may encounter. We have also prepared a letter you can send to clients that gives them a quick overview of the new law's rebate provisions. Related Resources 1. 2. 3. 4. More Information on Stimulus Payments (IRS site) REFUND OPPORTUNITY for Unmarried Couples or Others Incentives for Investment in Equipment and Machinery in 2008 Numerous Tax Changes Now in Place for 2007 and 2008
Q. Which Clients Get a Rebate Check? A. Clients are generally entitled to a rebate check if they had a net income tax liability or had "qualifying income" of at least $3,000 for 2007. For this purpose, ESA defines "net income tax liability" as the excess of (1) an individual's regular tax liability and alternative minimum tax over (2) the sum of all nonrefundable credits (other than the child credit). "Qualifying income" includes:
Earned income, Social Security benefits, and Veterans' disability payments.
Earned income includes (1) gross income from wages, salaries, tips, and other employee compensation and (2) net self-employment earnings. Excluded individuals. Rebates will not be available to nonresident aliens or to individuals who can be claimed as a dependent on someone else's tax return. In order to prevent undocumented aliens from receiving rebates, ESA denies rebates to individuals who do not include valid taxpayer identification numbers on their tax returns. For this purpose, a valid taxpayer identification number is defined as a Social Security number. It does not include a TIN issued by the IRS. Higher-income clients will also not be entitled to rebates (see below). Q. What Exactly Is Being Rebated? A. If a rebate is defined as a return or refund of something already paid, then what is being rebated? From this strict definition, the rebate checks are not true rebates. The socalled "rebate" is actually forward looking. It works this way. ESA creates a refundable "recovery rebate credit" for 2008. The checks represent an advance payment of the tax benefit that will result from the recovery rebate credit. Instead of having individuals wait until early 2009 to claim their credits (or having the credits claimed in dribs and drabs through reduced income tax withholding), ESA provides for immediate payment. Q. What Makes Up the Credit? A. The credit has two components: (1) a basic credit and (2) a qualifying child credit. The amount of the rebate will be computed in the same manner as these credit components, except that the computation will be done on the basis of tax returns filed for 2007 instead of 2008. In other words, the rebate checks will be calculated as if the credit had been in effect in 2007 and individuals were receiving a refund of 2007 overpayments. Thus, some individuals who are eligible for the credit may not receive a rebate check because they were not credit-eligible based on their 2007 returns. The rebate amounts and the credit amounts will be reconciled on the 2008 return (see below). Q. Can You Calculate the Likely Benefit? A. With a reminder to taxpayers that the check is ultimately computed by the IRS, you can provide an estimate based on calculations of the two components. That is, you would compute the Basic Credit component, then compute the Qualifiying Child Care component, and add the two together.
Q. How Is the Basic Credit Component Computed? A. The basic credit is equal to the greater of 1. The lesser of (a) $600 ($1,200 on a joint return) or (b) the individual's net liability, or 2. The minimum credit amount if the individual qualifies. The minimum credit amount is $300 ($600 on a joint return). An individual qualifies for the minimum credit amount if 1. The individual's qualifying income (see above) is at least $3,000 or 2. The individual's income tax liability is at least $1 and the individual's gross income is greater than the sum of the applicable standard deduction amount and one personal exemption (two personal exemptions on joint returns). Example 1. Mary Brown, a single taxpayer, had $4,000 of qualifying income for 2007 and her net income tax liability was $280. Mary qualifies for the minimum credit amount and will receive a rebate check of $300. Example 2. Same facts as in Example 1, except that Mary's net income tax liability was $450. Mary will receive a rebate check of $450. Example 3. Paul Smith, an unmarried college student, earned $2,500 in 2007 from a parttime job and his parents supplied another $2.000. The remainder of his support came from a loan that Paul took out. Even though Paul could not be claimed as a dependent (he provides more than one half of his own support), he will receive no rebate check. Paul had no net income tax liability and he does not qualify for the minimum credit amount. Example 4. Same facts as in Example 3, except that Paul received $3,500 in earnings from his job. Paul qualifies for the minimum credit amount and will receive a rebate check of $300. Q. How Is the Qualifying Child Credit Component Computed? A. An eligible individuals who is entitled to the basic credit are also entitled to an additional credit amount of $300 multiplied by the number of qualifying children of the individual. The definition of a qualifying child for purposes of the recovery rebate credit is the same as it is for the child tax credit. In other words, a person is the qualified child of an individual if 1. The person is the individual's son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. 2. The person has not attained the age of 17. 3. The person has the same principal place of abode as the individual for more than half the year. 4. The person has not provided more than half of his or her own support for the year.
Example 5. Bill and Susan Quinn, joint filers, had $4,000 in qualifying income, one qualifying child, and no net tax liability for 2007. The Quinns will receive a rebate check of $900--$600 for the minimum credit amount and $300 for the qualifying child. Example 6. In 2007 Tom and June Nelson, joint filers, had $2,000 in qualifying income, one qualifying child, and an $1,100 net tax liability (resulting from other nonqualifying income) prior to claiming the child tax credit. (The Nelsons' actual liability after the child credit was $100.) The Nelsons had a net tax liability for purposes of determining the rebate of $1,100. They will receive a rebate of $1,400--$1,100 for the basic credit and $300 for the qualifying child credit. Example 7. In 2007, Ted and Jennifer Parker, joint filers, had $40,000 in qualifying income, two qualifying children, and a net tax liability of $1,573 prior to claiming the child tax credit. (The Parkers' actual tax liability after the child credit was -$427.) The Parkers will receive a rebate of $1,800-a $1,200 basic credit (the lesser of $1,200 or net tax liability) and $600 for the two qualifying children. Q. What Additional Requirements Might Prevent a Taxpayer from Getting a Check? A. The IRS says that individuals will not get a rebate check unless they file a 2007 tax return. So individuals who are eligible for the rebate but aren't required to file a return (e.g., their income mostly comes from Social Security benefits) must nevertheless file a 2007 return to get a rebate [IR 2008-18]. For those individuals who must file a return only to get the rebate, the IRS is allowing the filing of a modified Form 1040A. The modified Form 1040A requires the completion of only certain selected lines. A mock-up of the modified Form 1040A is available at IRS.gov [IR-2008-21]. [ PDF, 54 KB] Q. Is the Recovery Rebate Credit Phased out for Higher-Income Clients? A. Yes. The amount of the credit (including both the basic credit and the qualifying child credit) is phased out at a rate of 5% of adjusted gross income above certain income levels. The beginning point of this phase-out range is $150,000 for joint filers and $75,000 for other individuals. Example 8. John and Carol Lee, joint filers, had $175,000 in adjusted gross income for 2007, two qualifying children, and a net tax liability (and actual tax liability) of $31,189. The Lees would, except for the rebate phase-out provision, receive a rebate of $1,800-$1,200 plus $300 per child. The phase-out provision reduces the total rebate amount by 5% of the amount of the Lees' adjusted gross income in excess of $150,000. Five percent of $25,000 ($175,000 minus $150,000) equals $1,250. Thus, the Lees will receive a rebate of $550 - $1,800 minus $1,250. Q. How Will the Recovery Rebate Credit Affect Clients' 2008 Tax Returns?
A. When preparing a client's return, you will reconcile the amount of the credit with the rebate check the client received. You will complete a worksheet calculating the amount of the credit based on the client's 2008 tax return. You will then subtract from the credit the amount of the rebate the client received. For many clients, the credit amount and the rebate amount will be the same. If, however, the result is a positive number (because, for example, a client paid no tax in 2007 and was not eligible for the minimum credit amount but is paying tax in 2008), the client may claim that amount as a credit against 2008 tax liability. If, however, the result is negative (because, for example, the client owed tax in 2007 but owes no tax for 2008 and is not eligible for the minimum credit amount), the client is not required to repay that amount to the IRS. Otherwise, the rebate checks have no effect on 2008 tax returns to be filed in 2009; the amount is not includible in gross income and it does not otherwise reduce the amount of withholding. Q. Last, but Not Least, When Can Clients Expect their Rebate Checks? A. The Treasury Department has announced that the rebate checks will begin going out in early May and payments will be largely completed this summer. However, since the rebate is based on 2007 tax return information, clients who have a tax return extension will have to wait until their returns are filed to get their checks. Congress says that, in no event, will rebate checks be issued after December 31, 2008. This is designed to prevent errors by taxpayers who might claim the full amount of the credit on their 2008 tax returns and file those returns early in 2009, at the same time the Treasury checks might be mailed to them.