According to Forbes, the economic stimulus package President George W. Bush signed today requires the U.S. Treasury Department to send "tax rebates" of $300, $600, $1,200 (or more, if the recipient has kids) to 128 million American households. However, getting the rebate is not as simple as it sounds...
The rebate is technically a credit against your 2008 tax bill that is being paid (in most cases) as what we'll call a "prebate." This prebate is based on your 2007 income tax return. The actual credit is based on your 2008 tax return. Whichever year produces the bigger check for your family is the year that counts.
To complicate matters further, there are not just two tax years, but three different types of credits involved. Plus, all three credits are denied to folks who earn too much--with the benefit starting to phase out at $75,000 adjusted gross income for an individual and $150,000 for a couple. The $75,000 threshold also applies to single parents filing as heads of household.
Mercifully, the credits are allowed against the alternative minimum tax. But the credit phase-out can interact with other phase-outs in the tax code to produce some nasty results.
For example, Mel Schwarz, director of tax legislative affairs for Grant Thornton, calculates a one-income couple who is paying AMT and has been making tax-deductible contributions to a "spousal IRA" will pay an effective 48% tax on the next $5,000 of adjusted gross income, after their AGI hits $156,000. Pretty shocking, considering the top federal marginal rate is 35% and the stated AMT rate is just 26% or 28%.
Given such complications, it's not surprising that tax advisers have been brainstorming how families can get the greatest possible stimulus benefits by managing their 2008 (or even, in some cases, 2007) taxable incomes. (Example: If the earner in Schwarz's hypothetical family is self-employed, he may still be able to boost his own 2007 contribution to a pretax retirement account to avoid that punitive 48% tax rate and snag a full stimulus credit.)
Why do we say there are three different types of credits? First, there's the basic $300 per adult "refundable" rebate, that goes to any adult who doesn't earn too much, and in 2007 or 2008, receives at least $3,000 of earned income and/or Social Security benefits, veterans disability, disabled veterans' survivors payments or railroad retirement income. So-called SSI payments don't count.
Mark A. Luscombe, principal analyst at CCH Tax, a Wolters Kluwer business, points out another, less discussed wrinkle: Any taxpayer who owes at least $1 in tax and has gross income of at least $8,750 for a single or $17,500 for a couple is also eligible for the refundable adult credit. That provision is particularly important for newly self-employed and newly retired folks who aren't yet receiving Social Security--taxpayers who may be living off savings and are able to manage the realization of income to make sure they qualify.
By the way, "refundable" in tax-speak means that you get this check regardless of whether you actually paid any income taxes---in other words, exactly the opposite of what a sensible person might think of as a "refund." Importantly, to get a prebate of this or any of the other credits, you must file a 2007 tax return, the IRS says, even if you wouldn't otherwise have to.
The second of the three credits is also refundable--it's a $300 per child tax credit, which goes to parents who qualify for the $300 refundable adult check. Note that the child must be younger than 17 for all of the year. But for which year? The IRS says it doesn't know yet. But tax lawyers say it will probably be for 2007, if you're getting a prebate.
Finally, there's an extra $300 per adult nonrefundable credit, which can only be used to reduce taxes you actually owe for 2007 or 2008. In other words, to get the full $600 per adult break--the $300 refundable credit plus the $300 nonrefundable credit--you must owe at least $600 per adult in taxes.
But that $600 per adult is before the child credit. So a young couple with two toddlers who owed exactly $1,200 in income taxes in 2007 will be getting a check from Uncle Sam for $1,800---that's $600 per adult, plus $300 per child.
If the couple owed $900 in 2007 tax, they'd get $450 per adult, or a total of $1,500--$900 for the adults and $600 for the kids.
If that same couple owed no income taxes for 2007, but had at least $3,000 in earnings from Social Security or veteran's disability, they'd get a check for $1,200 in May or June---$300 per adult plus $300 per child. Then, if they had higher earnings in 2008, and ended up owing at least $1,200 in tax for 2008, they'd get an additional tax credit of $600 on their 2008 return.
The math works like this: They'd be eligible for the full $1,800 credit in 2008 ($1,200 for adults, $600 for kids). But they've already collected $1,200 of that as a prebate. Most of the dollars will be doled out up front; Congress' Joint Tax Committee estimates the credit will cost the Treasury $107 billion this year and $10 billion next year.
OK, but what if the couple got the full $1,800 prebate based on 2007 taxes, then ended up owing no taxes for 2008 and so only qualified for a 2008 tax credit of $1,200? They get to keep the extra $600. Again, you get the higher amount you qualify for, based on either your 2007 or 2008 tax return.