Tax and Financial Articles

2008 Economic Stimulus Act

THE 2008 ECONOMIC STIMULUS ACT
The Rebate

In an effort to head off a major economic slowdown, the Administration and Congress agreed on a package of tax provisions intended to stimulate the economy. The Economic Stimulus Act of 2008 (”Act”) provides benefits to both individuals and businesses.

Below is a discussion of the rebate portion of the Act.

Rebate for Individ uals
Each qualifying individual will receive a tax credit in the form of a “recovery rebate” check to be received generally in 2008. Some taxpayers will receive a credit for some of or the entire rebate amount on their 2008 tax returns (filed in 2009).

The rebate has two components: (1) a base amount generally dependent on filing status and income-tax liability and (2) an increase in the child tax credit.

Base Amount.- The minimum base rebate amount is $300 ($600 for married couples filing jointly) . Very generally, a person will be entitled to this amount if he/she has at least $1 of federal income -tax liability or $3,000 in qualifying income. “Qualifying income” means the sum of earned income, veterans’ disability payments (including payments to survivors of disabled veterans), and Social Security benefits. So, those who do not pay taxes but have these other sources of income could be eligible for a rebate check.

The maximum base rebate amount is $600 ($1,200 for joint filers) . The amount of the rebate will be equal to the lesser of the individual’s tax liability or 10% of the first $6,000 of taxable income ($12,000 for joint filers).

Example: A married couple is retired and living on Social Security benefits only. They pay no income tax on their joint return. The couple would be entitled to a $600 rebate check.

Example: A single individual has a taxable income of $25,000 and pays income tax of $500. The rebate amount is $500 -the lesser of her tax ($500) or 10% of $6,000 ($600).

Example: A married couple files a joint return showing $50,000 in taxable income and a tax of $10,000. The couple would receive a base rebate of $1,200 (10% of the first $12,000 of taxable income).

In determining taxable income for eligibility and rebate purposes, taxpayers generally must use 2007 income as reported on their 2007 tax return, filed in 2008. If a person isn’t eligible for a rebate check based on 2007 income (for example, where the individual was someone else’s dependent for 2007), but becomes eligible during 2008, then the IRS won’t send that person a rebate check. However, the individual will be able to claim a credit when he files his 2008 return.

Child Credit Amount.- If an individual receives at least $1 of the base rebate and has qualifying children under age 17, that individual will receive an additional child tax credit of $300 per child, which will be included in the rebate check. This amount is a refundable credit, so the recipient receives this extra amount even if the amount of the recipient’s 2007 income tax is less than the total child tax credit.

Example: A married couple files jointly with three qualifying children. Their taxable income is $45,000 and their income tax is $5,000. The amount of the total rebate check for the couple would be $1,200 (base amount) plus $900 (three times $300 as additional child tax credit) , for a total of $2,100 .

Recovery Rebate Phase Out.- The rebate amount (including both the base credit and the additional child tax credit) is phased out at a rate of 5% of adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

Example: A married couple filing a joint return has two qualifyin g children and $160,000 of AGI. The maximum rebate of $1,800 (i.e., $1,200 base credit plus $600 additional child tax credit) is reduced by $500 (5% of the $10,000 AGI in excess of $150,000) , so the couple’s rebate is $1,300.

Therefore, most higher -income individuals’ rebate amounts will be reduced or eliminated. There is no specific amount of AGI at which the credit is fully phased out, since that amount will depend on the specific family situation of the taxpayer.