The final stimulus bill that flew through Congress yesterday is very close to the House bill, except with free stuff thrown in for old folks and veterans who might not get any free stuff otherwise. The rebates will work like this:
The IRS will look at your 2007 return. If you incurred at least $600 in tax, or $1,200 on a joint return, the IRS will mail you a $600 ($1,200 joint) check.
If your tax was less than that, the IRS will send you the lesser amount.
You'll also get a $300 check for each child for whom you received a 2007 credit.
The rebate will be reduced by 5 cents for each dollar your adjusted gross income exceeds $75,000, or $150,000 for joint returns.
For folks without at least $300 of 2007 income tax liability, the rebate works this way:
-you had at least $1 of tax liability and gross income of at least $8,750 (or $17,500 joint);
at least $3,000 of income from self-employment, social security benefits, or veterans disability or survivor benefits,
you will get a $300 check, or $600 for a joint return. You also will get $300 per qualifying child.
The credit phases out five cents for each dollar adjusted gross income exceeds $75,000 on single returns or $150,000 on joint returns. This means no credit for singles with AGI over $87,0000 and joint filers with AGI over $174,000, unless they have children; then the phase out stretches out to eventually reclaim the $300-per-child credit.
When you do your 2008 return, you will recompute the credit using 2008 numbers. If you compute a higher credit, you get the difference when you file your return. If the credit is lower using 2008 numbers, you won't have to pay it back.
Some examples, mostly adopted from the Joint Committee on Taxation technical explanation, are at the bottom of this post (click "read more" below if you don't see them).
UPDATE: No, the rebate won't be taxable on your federal return, and Iowa's politicians say it won't be taxable for Iowa purposes.
Increased Sec. 179 deduction. Section 179 allows businesses to expense in the year of acquisition the cost of non-rental property other than real property that would otherwise have to be capitalized and depreciated. This was to be limited to $128,000 in 2008. The stimulus package raises this to $250,000 for taxable years that begin after 12/31/2007 but before 12/31/2008. It phases out dollar-for-dollar as fixed asset purchases exceed $800,000.
Bonus Deprecation. The bill allows taxpayers to expense 50% of the cost of new property placed in service during the period beginning January 1, 2008, and ending December 31, 2008, regardless of your taxable year. Used property normally won't qualify. Aircraft and some property with a long construction period qualify through 12/31/2009. Qualifying property includes machinery, software, and certain "qualified leasehold improvements." If there was a binding contract in place to acquire the property before January 1, 2008, the property will not qualify for bonus depreciation. Property placed in service after 2008 may qualify if it is acquired pursuant to a binding contract entered into from 1/1/2008 through 12/31/2008.
Both bonus depreciation and Section 179 deductions are fully allowed in computing alternative minimum tax.
The five-year net operating loss carryback provision in the Senate bill did not make it into the final bill.
The TaxProf has a roundup, including links to the bill, committee explanations, and press releases.
For the examples below, "qualifying income" is net self-employment income, veterans disability or survivors benefits, and social security benefits.
Example 1. -- A head of household taxpayer has $4,000 in qualifying income, one qualifying child, and no net tax liability prior to the application of refundable credits and the child credit. Such taxpayer would receive a rebate of $600: $300 for having at least $3,000 of qualifying income, and $300 per child.
Example 2. -- A married taxpayer filing jointly has $4,000 in qualifying income, one qualifying child, and no net tax liability prior to the application of refundable credits and the child credit. Such taxpayer would receive a rebate of $900: $600 for meeting the earned income test, and $300 per child.
Example 3. -- A married taxpayer filing jointly has $2,000 in earned income, one qualifying child, and $1,100 in net tax liability (resulting from other unearned income) prior to the application of refundable credits and the child credit (the taxpayer's actual liability after the child credit is $100). Such taxpayer would receive a rebate of $1,400: $1,100 of net tax liability, and $300 per child.
Example 4. -- A married taxpayer filing jointly has $40,000 in earned income, two qualifying children, and a net tax liability of $1,573 prior to the application of refundable credits and child credits (the taxpayer's actual tax liability after the child credit is -$427). Such taxpayer would receive a rebate of $1,800: $1,200 (greater of $600 or net tax liability not to exceed $1,200), and $300 per child.
Example 5. -- A married taxpayer filing jointly has $175,000 in earned income, two qualifying children, and a net tax liability of $31,189 (the taxpayer's actual liability after the child credit also is $31,189 as their income is too high to qualify). Such taxpayer would, in the absence of the rebate phaseout provision, receive a rebate of $1,800: $1,200 (greater of $600 or net tax liability not to exceed $1,200), and $300 per child. The phaseout provision reduces the total rebate amount by five percent of the amount of the taxpayer's adjusted gross income as exceeds $150,000. Five percent of $25,000 ($175,000 minus $150,000) equals $1,250. The taxpayer's rebate is thus $1,800 minus $1,250, or $550.
Example 6. A single retired taxpayer has no income tax, but has social security benefits of $12,000 for 2007. The taxpayer will receive a rebate of $300 because the social security benefits give the taxpayer at least $3000 of "qualifying income."
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to