Last week, Congress passed the Economic Stimulus Act of 2008, which requires the U.S. Treasury to send rebate checks to eligible individuals. While the media has described the big picture on these rebates, this Alert outlines the detailed requirements for receiving rebates.

Who gets rebates? Only individual taxpayers can receive rebates; trusts, estates and businesses are not eligible.1 However, not all individuals will qualify for a rebate. People who can be claimed as someone else's dependent are not entitled to a rebate, nor are nonresident aliens or illegal immigrants.

Does that mean all other individuals get rebates? No. To be eligible for a rebate, for 2007 you must either (1) owe tax2; or (2) have at least $3,000 of qualifying income. Qualifying income means earned income generally, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

How much is the rebate? An eligible single person with no qualifying children gets a maximum rebate of $600 or a minimum rebate of $300. An eligible married couple filing jointly with no qualifying children gets a maximum rebate of $1,200 or a minimum rebate of $600. Single taxpayers whose 2007 tax was $600 or more are eligible for the maximum rebate. For married couples filing jointly, the maximum rebate is available if their tax was $1,200 or more. Eligible taxpayers whose 2007 tax was less than the maximum rebate are limited to the greater of the minimum rebate or their 2007 tax. For example, a single taxpayer whose 2007 tax was $500 will receive 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 the taxpayer for more than half of the year, and be the taxpayer's child, step-child, sibling, step-sibling, or descendant. 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 percent 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 and 2007 AGI of $160,000 would receive a rebate of $700: [the $1,200 basic rebate less a phase-out of $500 (i.e., 5 percent x ($160,000 - $150,000)].

Are any special forms required to get a rebate check? No. The IRS will automatically figure the rebate for all taxpayers who file a tax return for 2007 (due April 15, 2008), based on the income shown on that 2007 return. It will start sending rebate checks out in May for those who file before then.

What about taxpayers who don't have to file a return? Here's where it gets tricky. Many people who normally don't have to file a return will have to do so in order to get a rebate check. For example, an individual whose only income is $3,000 of earnings normally would not be required to file a return. Likewise, an individual whose entire income consists of $8,000 of social security benefits normally would not have to file a return. These individuals should file either Form 1040 or Form 1040A to show the IRS that they meet the $3,000 qualifying income threshold. They will not owe any income tax as a result of filing. They should enter on Line 20a of Form 1040 or line 14a of Form 1040A the following benefits in any combination:

  • Social security benefits reported on the 2007 Form 1099-SSA, which should have been received in January 2008.
  • Railroad retirement benefits reported on the 2007 Form 1099-RRB, which should have been received in January 2008.
  • The sum of veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans' Affairs in 2007.

Do rebates affect 2008 taxes? The 2007 rebate usually won't affect taxes owed for 2008. However, when taxpayers prepare their 2008 taxes, they can compute what the 2007 rebate would have been based on their 2008 income. If the rebate they would receive based upon their 2008 income is higher, they will get a credit against their 2008 taxes for the difference. If it is lower, they won't have to pay the difference back.

Footnotes

1. Although business entities won't get rebates, the Economic Stimulus Act provides other tax breaks for businesses.

2. For rebate purposes, an individual's tax liability is equal to the sum of the individual's regular and alternative minimum tax, less the sum of all non-refundable credits other than the child tax credit.



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