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2/11/2008

Stimulus Act jumpstarts the economy with cash rebates

Several times in the past Congress has provided special cash rebates to taxpayers. For example, under the Tax Reduction Act of '75, the Treasury paid a refund of 10% of an individual's tax liability, up to a $200 maximum ($100 minimum), subject to a phaseout for adjusted gross income (AGI) from $20,000 to $30,000. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided a credit equivalent to the value of the rate reduction under EGTRRA's then new 10% income tax rate bracket, which most taxpayers received in the form of a check. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) paid its newly increased child credit amounts in advance in a manner similar to the advance payment checks under EGTRRA.

New law. To stimulate the economy, the Stimulus Act provides for a refundable recovery rebate credit to eligible individuals in 2008. Most will receive a rebate check in 2008 from the U.S. Treasury based on filing status and income on the 2007 return they file in 2008. Some will get a tax credit in 2009 when they file their returns for tax year 2008, and still others (depending largely on income in tax years 2007 and 2008) may receive a combination of a rebate check in 2008 and an income tax credit in 2009. The credit is composed of a basic credit amount and a qualifying child amount. ( Code Sec. 6428 , as added by Stimulus Act 101) Any individual, other than a nonresident alien, an estate or trust, or a dependent, that meets the requirements is eligible for the credit. ( Code Sec. 6428(e)(3) )

  Observation: For purposes of Code Sec. 6428(e)(3) , a dependent includes any individual for whom a Code Sec. 151 deduction is allowable to another taxpayer. Thus, students who are (or can be) claimed as dependents by their parents aren't eligible individuals, even if they have enough income to have to file a return.

Basic credit amount. An eligible individual receives a basic credit for the first tax year beginning in 2008 equal to the greater of:

(1) his net income tax liability up to a maximum of $600 ($1,200 for a joint return); ( Code Sec. 6428(a) ) or

(2) $300 ($600 for a joint return) if either (a) the taxpayer's “qualifying income” is at least $3,000; or (b) his net income tax liability is at least $1 and gross income is greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return). ( Code Sec. 6428(b)(1)(A) )

  Observation: Thus, the minimum basic credit for eligible individuals who meet requirements (1) or (2) is $300 ($600 on a joint return). The maximum basic credit is $600 ($1,200 on a joint return). The basic credit will be between the minimum and maximum only if the individual's net income tax liability falls between the minimum and maximum.

Net income tax liability ” for this purpose is the excess of the sum of the individual's regular tax liability (under Code Sec. 26(b) ) and alternative minimum tax (under Code Sec. 55 ) over the sum of all nonrefundable credits (other than the child credit). It is not reduced by the refundable recovery rebate credit or any other currently refundable credit. ( Code Sec. 6428(e)(1) )

Qualifying income ” includes:

... earned income;

... Social Security benefits (as defined in Code Sec. 86(d) ); and

... any compensation or pension received under chapter 11 (compensation for service-connected disability or death), chapter 13 (dependency and indemnity compensation for service-connected deaths), or chapter 15 (pension for non-service-connected disability) of title 38, U.S. Code. ( Code Sec. 6428(e)(3) )

  Observation: Thus, retirees getting Social Security income and disabled veterans and their survivors may qualify for the rebate. Also, those who receive Social Security disability benefits can receive the credit.

Earned income ” has the same meaning as used for the earned income credit, except that it includes combat pay and doesn't include net earnings from self-employment which are not taken into account in computing taxable income. ( Code Sec. 6428(e)(4) )

Addition credit for qualifying children. If an individual is eligible for any amount under the basic credit, he may be eligible for a qualifying child credit. An additional $300 is added for each qualifying child (as defined under the Code Sec. 24 child credit). ( Code Sec. 6428(b)(1)(B) ) Under Code Sec. 24 , an individual can claim a child credit of $1,000 for 2008 for each qualifying child under the age of 17. Generally, a qualifying child must have the same principal place of abode as the taxpayer for more than one-half the tax year, satisfy a relationship test (i.e., be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any such individual), and must not have provide more half of his or her own support for the year. A child who is not a citizen, national, or resident of the U.S. can't be a qualifying child.

Illustration: A married couple filing jointly with one child has earned income of $4,000, and no net tax liability. Their rebate is $900: (i.e., $600 basic + $300 child rebate). (JCX-05-08)

Illustration: A head of household has $4,000 in earned income, one qualifying child, and no net tax liability before applying refundable credits and the child credit. He receives a rebate of $600 ($300 + $300 for the child). (JCX-05-08)

Illustration: A married couple filing jointly has $40,000 in earned income, two qualifying children, and a net tax liability of $1,573 before refundable credits and the child credit are applied (their actual tax liability after the child credit is −$427). They get an $1,800 rebate: [$1,200 + ($300 2 children)]. (JCX-05-08)

Illustration: A married couple filing jointly has $2,000 in earned income, one qualifying child, and $1,100 in net tax liability (from other unearned income) before applying refundable credits and the child credit (their actual liability after the child credit is $100). The taxpayers have a $1,400 rebate: ($1,100 basic credit + $300 child rebate). (JCX-05-08)

Phaseout. The amount of the recovery rebate credit (both the basic and the child's amount) is reduced (but not below zero) by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). ( Code Sec. 6428(d) )

  Observation: There's no specific amount of AGI at which the credit is fully phased out. This depends on the amount of the recovery rebate credit to which the taxpayer is otherwise entitled. For example, for joint filers with no children who would otherwise get the maximum $1,200 basic credit, the credit would be lost at AGI of $174,000 [5% ($174,000 − $150,000) = $1,200]. For a single filer with no children who would otherwise get the maximum $600 basic credit, the credit would be lost at $87,000 [5% ($87,000 − $75,000) = $600].

Illustration: A married couple filing jointly with two children has AGI of $160,000, and net tax liability of over $1,200. Their rebate is $1,300: [$1,800 (i.e., $1,200 basic + $600 children rebate) − $500 phaseout (i.e., 5% ($160,000 − $150,000)]. (Treasury Fact Sheet)

Illustration: A single parent with two children has AGI of $90,000, and net tax liability of over $600. Her rebate is $450: [$1,200 (i.e., $600 basic + $600 children rebate) − $750 phaseout (i.e., 5% ($90,000 − $75,000)]. (Treasury Fact Sheet)

Illustration: 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)]. (Treasury Fact Sheet)

Illustration: An individual has AGI of $80,000, and net tax liability of over $600. His rebate is $350: [$600 basic rebate − $250 phaseout (i.e., 5% ($80,000 − $75,000)]. (Treasury Fact Sheet)

Illustration: A married couple filing jointly have $175,000 AGI, two qualifying children, and a net tax liability of $31,189. Before applying the phaseout, they have an $1,800 rebate: [$1,200 + $600 ($300 2 children)]. The phaseout reduces the $1,800 rebate to a $550 rebate: [$1,800 − $1,250 reduction, i.e., ($175,000 AGI − $150,000) 5%]. (JCX-05-08)

Valid identification requirement. No credit is allowed to an individual if he doesn't include on his return a valid identification number (i.e., his Social Security Number (SSN)). If a joint return is filed by a married couple, both have to include their SSNs. If a credit amount is claimed for a qualifying child, the child's SSN must be included on the return. A Taxpayer Identification Number (TIN) issued by IRS cannot be substituted for a taxpayer's SSN. ( Code Sec. 6428(h) ) This provision is intended to deny the rebate credit to illegal immigrants. (JCX-11-08)

Mechanics of relief. In technical terms, the recovery rebate credit is structured as a credit against tax for the 2008 tax year. ( Code Sec. 6428(a) ) However, those who are eligible individuals for the 2007 tax year will get an advance refund of the credit in 2008—via a check from the Treasury or direct deposit to their bank accounts—based on their tax situation for 2007. ( Code Sec. 6428(g)

  Observation: Most eligible individuals will get their advance refund based on their tax situation as reported on their 2007 return. However, some eligible individuals, such as persons receiving social security payments or veterans' disability payments, won't have to file a return for 2007 because their incomes are below the return filing threshold. IRS has yet to explain how these people will get their refunds. On its website, IRS says it will be “working closely with the Department of Veterans Affairs and Social Security Administration along with beneficiary organizations to ensure that all eligible individuals know what to do to receive a stimulus payment.”

IRS will attempt to issue all payments as rapidly as possible to taxpayers who timely filed their 2007 tax returns. (Taxpayers who file late or under extensions will receive their payments later.) (Committee Report)

When the 2008 return is filed in 2009, taxpayers on will use a worksheet to:

(1) calculate the amount of the rebate credit based on their 2008 tax return, and

(2) reconcile that amount against the advance rebate payment they received based on their tax situation as reported on their 2007 return. ( Code Sec. 6428(f) , Committee Report)

For many taxpayers, the two amounts will be the same. If, however, the amount in (1) exceeds the amount in (2) (because, for example, the taxpayer paid no tax in 2007 but is paying tax in 2008), the taxpayer will be able to claim that amount as a credit against 2008 tax liability. No interest is allowed on any overpayment. ( Code Sec. 6428(g)(4) If, however, the amount in (1) is less than the amount in (2) (because, for example, the taxpayer paid tax in 2007 but owes no tax for 2008), the taxpayer will not have to repay the rebate amount to IRS. ( Code Sec. 6428(f) ) Otherwise, the rebate payments have no effect on tax returns filed in 2009; the amount isn't includible in gross income and it doesn't otherwise reduce the amount of withholding.

  Observation: An individual who wasn't an eligible individual for 2007 may become one for 2008, e.g., where the individual was a dependent for 2007 but not for 2008. IRS won't send a rebate check to such an individual, because rebate checks are based on information on the 2007 return. However, the individual will be able to claim the credit when he files his 2008 return. In the opposite situation, where the taxpayer loses his status as an eligible individual in 2008, IRS will send a rebate check in 2008 based on his 2007 return, and the rebate won't have to be refunded.

In no event will IRS issue checks after Dec. 31, 2008. ( Code Sec. 6428(g)(3) ) 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 IRS check might be mailed to them. Payment of the credit (or the check) is treated, for all purposes of the Code, as a payment of tax. Any resulting overpayment is subject to the refund offset provisions, such as those applicable to past-due child support under Code Sec. 6402 .