One of President George W. Bush’s first acts after taking office was to sign legislation to provide a “rebate” to taxpayers as a means of stimulating the economy in 2001. Thanks to the Economic Stimulus Act of 2008, it looks like one of his last acts will be to sign another rebate-generating law to stimulate the economy again in 2008. This article will take a look at what the 2008 law provides and what it is intended to do.
Where’s the Beef?
In the 1980’s, a Wendy’s commercial titled “Fluffy Bun” featured an elderly actress searching for the meat in an oversized bun and asking “where’s the beef?” The obvious answer was: other burgers had very little beef, but Wendy’s burgers were filled to overflowing with it.
There are several parallels between the Wendy’s commercial and the bipartisan Economic Stimulus Act of 2008 (the Act). First, there is the magnitude of the Act. The competitors’ beef patties were very small in comparison to their buns - and the rebates available are relatively small in comparison to the economy. The idea of the Act is to jump start the massive $13 trillion U.S. economy. Congress crafted, and the President signed, a bill that is expected to put $152 billion in the hands of consumers in order to help the economy. But will injecting buying power equal to 1% of the economy really have a significant effect? Only time will tell.
A second parallel is that, regardless of the size of the beef patty, there is still something to eat on the bun - and that is true of the Act as well. It has two major features: the one that received substantially all the attention is the “rebate” payment that will go to approximately 130 million Americans. Technically called “advance credit payments,” these monies are expected to total approximately $108 billion. This article will discuss that feature.
The second major feature of the Act is an increase in the amount of equipment purchases businesses can expense in 2008. This benefit, along with some additional help for homeowners caught in the credit crunch, is expected to provide approximately $45 billion in tax savings for small businesses, which Congress hopes will encourage spending. For further discussion of these provisions, see this month’s general business article.
What’s in it for you?
So far, the Act sounds good to the average taxpayer, but just exactly what is the definition of an average taxpayer? Do you fit in this category and how much will the rebate be anyway?
The rebate amount will depend on your 2007 adjusted gross income, but there are a few maximum amounts to keep in mind. To understand how the law will affect you, you must understand what it really does. The “rebate” is actually an advance payment for a credit you would get on your 2008 tax return as a result of the law. Keep this in mind as we continue our discussion.
The maximum a single taxpayer can hope to get is an amount equal to their 2007 income tax liability, not to exceed $600. The amount is double that for taxpayers who are married and filing jointly. In addition you will receive $300 for each qualifying child, with the definition of a qualifying child being the same as a child who qualifies for the child tax credit.
One of the major issues in negotiating the bill centered on individuals who don’t pay tax, such as those who depend on Social Security, those receiving certain veteran’s benefits, and individuals who earn enough to pay employment taxes. If the combination of an individual’s earned income, Social Security benefits and veteran’s benefits equals or exceeds $3,000, that individual will be eligible for a $300 credit. Alternatively, if a person has at least a $1 tax liability and income equal to the standard deduction amount ($8,950 for singles and $17,900 for joint filers), he or she will also be eligible for the $300 credit.
Earlier, we discussed the fact that the rebate you get depends on your 2007 adjusted gross income. That’s because the IRS will assume that your income for 2007 is indicative of your 2008 tax liability. Since the rebate is really an advance payment of a credit against 2008 taxes, this assumption is a key one. It’s also a very good reason to file your 2007 tax return as quickly as possible, since you won’t get a rebate until the IRS can calculate it based on 2007 numbers.
There is, as usual, some bad news for high-income earners. The rebates begin to phase out at $75,000 for singles and $150,000 for joint filers. If you are single and have no children, your rebate will phase out completely at $87,000 of adjusted gross income, while the comparable number for joint filers is $174,000. If you have qualifying children, the phase-out formula is such that the point of total loss is higher than the $87,000 or $174,000 just mentioned.
So are you confused?
The foregoing is a high level overview of the new law. The fact is that there are various other eligibility requirements and the calculations are not as easy as they might sound. The good news is you won’t have to worry about calculating the amount of rebate for which you qualify - the IRS will do that. Your job will be to get your tax return filed quickly and accurately so that, when the rebates begin to be paid in May, yours won’t be delayed. To minimize the time it will take you to get your refund, you should consider providing the IRS with authorization to deposit it directly into your account.
When you think about it, by basing the rebate amount on 2007 adjusted gross income, Congress and the President have put you in a box of sorts. The need to file early is great if you have a refund coming, but those who expect to owe - and also expect a rebate - will have a decision to make; file early and pay the tax to get the rebate as soon as possible or extend and put off receiving it. Realistically, though, regardless of when you file, your 2007 tax is due in April anyway. For this reason, it’s best to file as early as possible and, as always, if you need help, give us a call.
Happy St. Patrick’s Day!