1. Rebates for many individual taxpayers.

"This bill reflects our principles. It is robust. It is pro-growth. It stimulates business investment. And it puts money into the hands of American consumers." -- President George W. Bush

"We are making history. What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country." --Speaker of the House Nancy Pelosi

(These payments are independent of any refund you may get or any tax you may owe on your 2007 tax return.)

2. Enhanced "Section 179" deduction limits for qualifying business equipment assets placed in service in tax years beginning in 2008. Under Section 179, you can immediately deduct 100 percent of the cost of most new and used business assets other than real estate.

3. Additional first-year bonus depreciation write-offs for qualifying assets that businesses purchase and place in service during calendar year 2008 (including autos used for business). This "bonus depreciation" can also be claimed for certain longer-lived assets that are purchased and placed in service during 2008 or 2009.

The centerpiece of the new law is the provision that will cause about 130 million individual taxpayers to automatically receive tax rebates, starting in May and continuing throughout the year.

Technically, the amounts will be considered reductions of 2007 federal income tax bills. However, the rebates are "refundable" which means they can potentially exceed 2007 tax bills, and they can even be collected by people who owe nothing to the IRS.

Here's what you need to know about the rebates.

How Much Will I Get?

The basic rebate amount is equal to the greater of:

• A flat minimum amount of $300 for an individual or $600 for a joint filer.
• A maximum amount equal to the taxpayer's net federal income tax liability, which is defined as regular tax plus any alternative minimum tax reduced by certain tax credits. This maximum amount cannot exceed $600 for an individual or $1,200 for a joint filing couple.

Special ground rules apply to the minimum rebates. To collect the minimum $300 or $600 rebate, the taxpayer must have either:

• At least $3,000 in total income from earned income, Social Security benefits, and certain veterans' benefits (including amounts paid to survivors of disabled veterans) or
• Net income tax liability (defined above) of at least $1, as well as gross income that exceeds the sum of the applicable basic standard deduction amount, plus one personal exemption amount (or two personal exemption amounts if the taxpayer files jointly).

 Example 1: Let's say a joint filing couple has no children, $2,000 of earned income and a net tax liability of $1,100 (because of some unearned income). They are entitled to a $1,100 basic rebate based on the tax liability amount.

 Example 2: Now let's look at a single filer with no children. Her 2007 federal income tax liability was zero, but she received $15,000 of Social Security benefits. She is entitled to a $300 minimum rebate based on her Social Security benefits.

 Example 3: A married joint filing couple has no children. Their 2007 federal income tax liability is $100, and they had gross income of $18,500 in 2007 from investments. They had no 2007 income from any other sources. They are entitled to a $600 minimum rebate based on their positive tax liability and gross income amount.

Child Rebate Amounts: Large Families Can Really Benefit

An individual who qualifies for a basic rebate under the rules explained above is also eligible to receive an additional rebate of $300 for each "qualifying child." There is no cap on the number of children.

The definition of a qualifying child is the one used for purposes of claiming the child tax credit. Specifically, the child must be under age 17 as of December 31 and be the taxpayer's qualifying child for dependency exemption deduction purposes. In addition, the child must be either:

1. The taxpayer's son, daughter, stepson, or stepdaughter.

2. A descendent of someone listed in #1, such as the taxpayer's grandchild.

3. The taxpayer's brother, sister, stepbrother, or stepsister.

4. A descendent of someone listed in #3, such as the taxpayer's niece or nephew.

Note: In general, a child of divorced parents is automatically considered to be the qualifying child of the custodial parent (the parent with whom the child spends more time during the year). However, by signing IRS Form 8332, the custodial parent can allow the other parent to treat the child as his or her qualifying child and claim the $300 rebate.

 Example 4: Let's say a joint filing couple has $2,000 of earned income, one qualifying child, and a net tax liability of $1,100 (because they also had some unearned income). They are entitled to a $1,100 basic rebate based on their tax liability, plus a $300 child rebate for a total of $1,400.

Phase-Out Rule Affects Higher-Income Taxpayers

Unfortunately, Congress decided that rebates are only to be given to low and middle-income folks. Therefore, the rebates are phased-out (reduced and possibly eliminated) for unmarried taxpayers with adjusted gross income (AGI) above $75,000 and for married joint filers with AGI above $150,000. Under the phase-out rule, the rebate amount is reduced by 5 percent of any excess AGI above the applicable threshold amount ($75,000 or $150,000). Therefore:

• An unmarried taxpayer's $600 rebate is completely phased out when AGI reaches $87,000 if there are no qualifying children. (If the taxpayer has children, income can be higher.)
• A married joint filer's $1,200 rebate is completely phased out when AGI reaches $174,000 if there are no qualifying children.
• The same phase-out rule also applies to child rebates.

 Example 5: A single filer has no qualifying children. His 2007 federal income tax liability exceeds $600. Before the phase-out rule, he would be entitled to the basic $600 rebate. However, if his AGI is $80,000, his rebate is reduced to only $350 [$600 minus (5 percent times $5,000 excess AGI) equals $350]. If his AGI exceeds $87,000, the rebate is completely phased out.

 Example 6: In this case, a married joint filing couple has two qualifying children. Their 2007 federal income tax liability exceeds $1,200. Before the phase-out rule, they would be entitled to a rebate of $1,200, plus two $300 child rebates, for $1,800 total. However, if their AGI is $175,000, their rebate is reduced to only $550 [$1,800 minus (5 percent times $25,000 excess AGI) equals $550]. If their AGI exceeds $186,000, the rebate is completely phased out.

Rebate Mechanics and a "Second Chance" Rule

The government will automatically issue rebates by check or by direct deposit payment based on information reported on your 2007 tax return (income, tax liability, and qualifying children).  The IRS issued a press release stating that even though some recipients of Social Security, certain Railroad Retirement and veterans' benefits may not be required to file a tax return because they don't meet the requirements, they must file a return this year to receive payments.

As you can see, most individuals won't get their rebates until after filing Form 1040 for last year. If you request an extension and don't file your 2007 tax return until October 15, 2008, you won't get a rebate until the end of the year. However, if you had a modest amount of earned income last year but are not required to file a 2007 return, the IRS will develop a procedure that allows you to get your rebate in a timely fashion.

Note: You cannot use your rebate to offset your 2007 federal income tax bill, nor can you apply your rebate to your 2008 estimated tax payment obligation. Why? Congress wants you to spend your rebate dollars to boost the economy.

Last but not least, some people will get a second bite at the apple based on information reported on their 2008 tax returns. For example, this "second chance" rule will apply if:

• Your 2007 income was too low or too high.
• Your 2007 tax liability was too low to qualify for the full $600 or $1,200 basic rebate amount.
• Your 2007 income was too high to qualify for the full $300 per-child rebate amount.

In such cases, you can collect in 2009 the difference between the amount already received in 2008 (if any) based on 2007 tax return information and the larger amount based on 2008 tax return information. The amount you are entitled to receive under the second chance rule will be treated as a refundable tax credit on your 2008 return. The same second chance rule also applies to amounts based on Social Security or Veterans' benefits.

What Type of Taxpayers Are Not Eligible?

Nonresident aliens, estates and trusts cannot receive rebates. In addition, no rebate is available to an individual who can be claimed as a dependent on another taxpayer's return (for example, a college student with more than $3,000 of earned income who could be claimed as a dependent on a parent's return).

Taxpayers without Social Security numbers cannot claim rebates, and numbers must be provided for qualifying children. Individual Taxpayer Identification Numbers cannot be substituted for Social Security numbers.

(Next time:  We'll Explain the Enhanced Tax Breaks Businesses Can Claim for Equipment and Other Qualifying Assets)

Save Article

Email PMN

Email to a Friend

Get Trade Pubs