The idea is remarkably simple: To get the economy moving again, you need to get people in a spending mood. What could be simpler than handing out tax rebates? Alas, as with all things related to the U.S. Tax Code, the question of who gets what turns out to be not so simple.
Now that the Senate has finished tinkering with the plan originally hatched in the House, and President Bush has said he’ll sign the $168 billion package, the folks at the Treasury are busy getting the word out about just who gets what.
The basic plan includes a $300 tax rebate for most people who earned income in 2007. Many will get rebates of $600 each, or $1,200 per couple. If you have children who qualify as dependents, you get another $300 for each child. If you earned at least $3,000 last year, but not enough to pay income taxes, you still get at least $300.
Now the fun begins.
Will I get a rebate check even though I owe the IRS?
— Tamara C., Fort Worth, Texas
No. If you owe taxes, the IRS will withhold your rebate and apply it to what you owe, according to a Treasury Department spokesman.
What the IRS is doing is cutting your tax bill. For example, if you owed $1,000 in taxes on the income you earned in 2007, now you owe $700. If you had exactly the right amount withheld, you’ll get a rebate check for the exact amount you’re entitled to. If had too much tax withheld, you’ll get a rebate plus a refund of any extra tax withheld during the year.
If you didn’t have enough withheld from your paycheck to cover your new, lower tax bill, you’ll still owe taxes. So instead of mailing you the check and having you mail it back, the IRS will just hold onto it and apply it to your bill. But when you pay what you owe, you’ll write a smaller check than you would have without the rebate.
With regards to the upcoming stimulus package, are the phase-out figures ($75,000 and $150,000) adjusted gross income or are they gross income prior to adjustment?
— Mark Z. Elma, New York
The limits are based on your adjusted gross income. So you really won’t know if you’re over the limit until you fill out your 1040 for the 2007 calendar year, adding up all your income and subtracting all your deductions.
For people who file an individual return, the rebates “phase out” at $75,000 of adjusted gross income; the limit is $150,000 of AGI for couples who file jointly. Above those amounts, the phase-out clips your rebate by 5 percent of any amount over the limit. So if you’re single and earned $80,000, you’ll get $350. (That's $600 minus 5 percent of the $5,000 you earned over the $75,000 limit, for a reduction of $250.) That effectively caps eligibility at $87,000 in income for singles and $174,000 for couples.
If you earned more than those limits in 2007, you get nothing. Unless you have kids. In that case, you get $300 per kid. But you could lose that too if you earned enough to burn off your child credit with the 5 percent phase-out. That would happen to a married couple with one child and income of $180,000 last year; the first $24,000 over the limit would burn up their individual credits and the next $6,000 would eliminate the $300 child credit.
For divorced couples with joint custody, the “kiddie” rebate goes to the parent who claims the child as a dependent in 2007. (Only one parent’s return can do so.)
But if you collect the $300 for a child, they won’t get a rebate on any tax they owe, say, from a summer job. So if your child earned $3,000 or more and you have a choice of whether to claim the child or not, your family could get a bigger rebate if you don’t claim your kid as a deduction. You’ll only get $300, but the child could get as much as $600 if she files for the rebate on her own. On the other hand, you’ll lose the $3,400 exemption for claiming your kid as a dependent. (Still with us?)
On the rebate issue, if filing jointly but only one spouse worked, will that lower the amount you might get in the rebate?
— Larry C., Eau Claire, Wis.
No, rebates for married couples are based on a joint return. So if you and your spouse together earned $100,000 and paid more than $1,200 in taxes, you’ll get a rebate for $1,200 for your “individual” credits — even if one spouse earned a lot less than the other. If you and your spouse only paid $750 in taxes (less than the $1,200 rebate limit), you only get back $750.
So it seems that the most needy senior citizens who have income from Social Security only, income low enough so there is not income tax on it, will not get any help from this. Is that correct?
— A. F., Cleveland
No, seniors who collected $3,000 in benefits get the rebate — even if they paid no taxes. The tinkering by the Senate was due, in part, to concerns that some retirees and veterans would have been left out in the original plan. So if you had at least $3,000 of “earned income” in 2007, you get a rebate.
(Earned income as defined by the IRS normally would have excluded Social Security benefits; for rebate purposes, Social Security and veterans’ benefits are now back in.) In general, earned income includes wages, salaries, and tips; union strike benefits; long-term disability benefits before retirement age; earnings from self-employment; and combat pay. Income that’s not considered “earned” includes interest and dividends, pensions, unemployment benefits, alimony and child support.
Do we have to pay the rebate checks back?
— Bobby T., address withheld
No, these payments are not treated as taxable income, according to the Treasury spokesperson. They’re yours to keep. Actually, the government wants you to spend them. Some economists who are skeptical of the plan’s impact believe that many people will, in fact, stash them away in a savings account or use them to pay off credit card bills. Neither of those uses will stimulate the economy they way the plan is intended to. But in an election year, no one seems to mind.
There’s one more wrinkle, which we saved for last because it doesn’t look like you’ll really have to worry about it. Technically, these are rebates against your 2008 income — even though they’re being paid out to anyone who files a return for 2007 and meets the eligibility guidelines. So what happens if you don’t meet the guidelines for 2007, but you do meet them in 2008?
In that case, says a Treasury spokesperson, you’ll get the rebate next year. If you got more than you should have — because you qualified for more in 2007 that you do for the 2008 return — you’ll get to keep the extra money.
Depending on when you file your return, you should get your check sometime between May and early July.