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Will You Get a Cash Rebate?

As part of the economic plan to stimulate the economy, the government will be sending rebate checks to most taxpayers. As with most tax issues, it is not simple and, in fact, somewhat complicated. There are many factors to consider, such as who qualifies for the rebate, how is it calculated, what does a taxpayer need to do, if anything, to get the rebate, and how does the rebate affect a taxpayer’s return for 2008. These rebates are actually advance payments for a new refundable tax credit called the Recovery Rebate Credit (RRC). This credit will be claimed on a taxpayer’s 2008 tax return. The rebates are, in fact, an advance payment of the new RRC and must be accounted for when a taxpayer files for his or her 2008 tax return in 2009.

So the government can get the money into people’s hands quickly and not wait for the 2008 returns to be filed in 2009, the IRS will compute and mail out advance payments of this 2008 credit based upon the information included on a taxpayer’s 2007 tax return. (IRS will make a direct deposit of the advance payment into a taxpayer’s account if direct deposit was requested for the 2007 return refund.) Then, when the taxpayer files their 2008 return, the RRC will be reduced by the amount of the advance payment. Should the advance payment exceed the amount of the RRC, the taxpayer will not be required to make up the difference!

Who does not qualify for a rebate? Specifically, only individuals who meet certain requirements will be receiving rebates. Businesses, estates and trusts do not qualify. Neither do individuals that are or can be claimed as a dependent on someone else’s tax return. Also excluded are non-resident aliens and illegal immigrants.

Do all qualified individuals get rebates? No, each individual must qualify for the rebates in one of two ways, and the rebates and the credit in 2008 is phased out for higher-income taxpayers. To qualify, a taxpayer must (1) owe tax, as computed in a special way, or (2) have at least $3,000 of qualifying income. Qualifying income generally includes earned income, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

How much will your rebate be? The rebates are broken into two categories, the basic credit rebate and the qualifying child rebate credit. For the basic credit rebate, a single person with no qualifying children gets a maximum rebate of $600 or a minimum rebate of $300. A married couple filing jointly with no qualifying children gets a maximum rebate of $1,200 or a minimum rebate of $600. To get the maximum, your 2007 tax (figured in a special way) must be $600 or more for a single person and $1,200 or more for a married couple filing jointly. To get the minimum, you must have at least $3,000 of qualifying income (explained above) or owe tax (figured in a special way) of at least $1. Your rebate amount will fall in between the minimum and maximum if your tax is more than $300 but less than the maximum rebate for your filing status. In that case, your rebate will be equal to your tax. Let’s say that you are single, and your tax is $500. In this scenario, your rebate will be $500.

An eligible individual who is entitled to any amount of the basic credit is also allowed a credit equal to $300 for each qualifying child of the individual, in addition to the basic credit. “Qualifying child” has the same meaning for this purpose as it has for purposes of the child tax credit. Thus, for each child that qualifies for the child tax credit, a taxpayer qualifies for an additional $300 rebate.

For example, a married couple filing jointly with one qualifying child could be eligible for a maximum rebate of $1,500 ($1,200 $300).

Phase out for higher-income taxpayers - The amount of the rebate (both the basic and the child amount) is reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). For example, a married couple filing jointly with one child has an AGI of $170,000, and net tax liability of over $1,200. Their rebate is $500: [$1,200 basic rebate plus $300 qualifying child rebate - $1,000 phase out (i.e., 5% × ($170,000 - $150,000)].

When will the rebates be issued? If you file a 2007 federal income tax return, the IRS will automatically figure your rebate based on your 2007 tax return (due April 15, 2008). Rebate checks will be sent out in May for those who file before that date.

Since these advance payments (cash rebates) are computed based on the data from the 2007 return, a 2007 return must be filed to obtain a cash rebate. Thus, some taxpayers, such as those receiving SS income and who are not otherwise required to file a return, must file one to qualify for the advanced payment. However, if a taxpayer does not file a 2007 return, he or she would still qualify for the RRC when a 2008 return is filed. This also applies to taxpayers who file late. They don’t lose the RRC – they just don’t receive it in advance and will have to wait for the benefit when their 2008 return is filed. The IRS is prohibited from issuing advance payments after December 31, 2008.

We hope this information is helpful. If you would like more details about the tax rebates, please do not hesitate to call.

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