Rebate Checks as Economic Stimulus
Consequences of the Economic Stimulus Act of
2008 for Individual Taxpayers
Sonja Pippin, Richard Mason, and Charles Carslaw
- The Economic Stimulus Act of 2008 that was signed into law on
February 13, 2008, includes a broad rebate program for individual
taxpayers. In general, individuals with earned income between $3,000
and $75,000 receive $600. A couple filing jointly with earned income
between $3,000 and $150,000 receives $1,200. In addition, individuals
or couples with qualifying children—defined as any child with
a valid Social Security number and eligible for the child tax credit
[IRC section 24(c)]—will receive an additional $300 per child
[IRC section 6428(a)].
rebate’s amount and eligibility are limited as follows:
for high-income taxpayers. Individuals (married couples
filing jointly) with more than $75,000 ($150,000) adjusted gross
income (AGI) are subject to a 5% phase-out for any income above
the phase-out amount. That is, an individual taxpayer with no
dependents and AGI of $87,000 or more will receive no rebate
[IRC section 6428(d)] [5% x ($87,000 – $75,000) = $600].
For a couple, the equivalent limit is $174,000 [5% x ($174,000
– $150,000) = $1,200].
qualified income and tax liability. Individuals and joint
filers must have either qualified income of at least $3,000,
or a net tax liability greater than zero and gross income that
exceeds the basic standard deduction plus the personal exemption
amounts [e.g., $8,950 for individual taxpayers and $17,900 for
joint filers; IRC section 6428(b)(2)]. Qualified income includes
earned income, Social Security benefits, and certain veterans
benefits [IRC section 6428(e)(1)]. The IRS has announced that
combat pay may also be considered qualified income (“Combat
Pay Can Count Toward Economic Stimulus Payment Eligibility,”
IR-2008-48, March 20, 2008) . The 2008 tax brackets, standard
deduction, and exemption amounts are based on the rate changes
and inflation adjustments to the tax brackets released by the
IRS in Revenue Procedure 2007-66, IRB 2007-45.
taxpayers. Certain taxpayers do not qualify for the rebate.
These are nonresident aliens, individuals who can be claimed
as dependents on someone else’s return, and estates and
trusts [IRC section 6428(e)(3)].
of the law is to stimulate the economy using a Keynesian approach
by providing a large segment of the population with some extra
cash in the hope that it will be spent. To do this, lawmakers
tried to get the cash into the hands of recipients as fast as
possible. This has created some problems and questions. The rebates
for filers using direct deposit were transferred by May 16, 2008.
The IRS began mailing checks on May 16, 2008; all checks were
to be mailed by July 11, 2008. Payments were sent out in order
of the last two digits of the taxpayer’s Social Security
of Rebate and 2008 Tax Credit
to be able to send the rebates to taxpayers starting in May 2008,
the amount of the rebate had to be based on the information provided
in the taxpayer’s 2007 tax return. (Taxpayers filing their
2007 tax returns by the April 15, 2008, due date received the
rebate checks starting in May 2008. Taxpayers filing an extension
will receive the rebate check once their 2007 tax return is filed.)
Actual eligibility for the tax credit is conclusively determined
by the information provided for the 2008 tax year. That is, the
final amount each taxpayer receives depends on the combination
of the advanced refund—as determined based on the 2007 tax
return—and the calculation of the credit in the 2008 tax
return, as provided for by IRC section 6428(a). In essence, the
Economic Stimulus Act of 2008 provides for a credit against the
2008 tax liability but seeks to provide for advanced receipt of
the credit in the form of an immediate rebate. This is similar
to how the 2001 rebate program contained in the Economic Growth
and Reconciliation Act of 2001 was implemented.
will reconcile the rebate received in 2008 with the tax credit
computed on the 2008 tax return by comparing the two amounts.
If the two numbers are equal, a taxpayer’s 2008 tax return
will not be affected. If subtracting the rebate from the credit
results in a positive number, the taxpayer will claim that number
as a credit against the 2008 tax liability. The following examples
illustrate this concept.
1. Taxpayer A is single with no dependents and has
taxable income of $70,000 in 2007 and $72,000 in 2008. His tax
liability is $13,923.75 in 2007 and $14,343.75 in 2008. He is
eligible for a credit of $600 against his 2008 tax liability.
Because he filed a 2007 return and was eligible for the credit
based on the 2007 tax return information, he received the $600
in May 2008. His 2008 credit will be offset by the rebate amount,
and no further benefit will be received.
2. Taxpayer B and her spouse file jointly. In 2007,
they report adjusted gross income of $120,000 and one qualifying
child. In 2008, their AGI is $128,000, and they now have two qualifying
children, one of whom was born in September 2008. Based on the
2007 tax return information, the couple received a rebate of $1,500
in May 2008 ($1,200 for the couple filing jointly, plus an additional
$300 for the qualifying child). When filing their 2008 tax return,
the allowable credit under IRC section 6428(a) is $1,800 [$1,200
+ (2 x $300 for the qualifying children)]. Because they already
received $1,500, their 2008 tax credit will be reduced by that
amount. A $300 credit will offset their 2008 tax liability.
As long as
the credit equals or exceeds the rebate amount, the calculation
is relatively straightforward. Questions may arise, though, when
the 2008 credit is less than the rebate. For example, consider
a couple filing jointly in 2007 with AGI of $80,000 and two qualifying
children. Based on the 2007 tax return information, they will
receive a rebate in 2008 of $1,800. If one of the children is
no longer qualifying in 2008 (e.g., due to reaching age 17), the
allowable credit in 2008 will be only $1,500. The entire credit
will be offset by the rebate amount, and the taxpayers have an
excess rebate of $300.
law nor the FAQs on the IRS website address taxpayers in an excess
rebate situation. However, the Congressional Research Service
Report (CRSR) from February 12, 2008 [David L. Brumbaugh, “Major
Tax Issues in the 110th Congress”], and the 2008 report
by the Joint Committee on Taxation imply that the rebate that
was paid in 2008 does not have to be returned in 2009 if circumstances
change. Specifically, the CRSR states:
credit will ultimately be based on individuals’ 2008 tax
and income, but it will be issued as checks from the U.S. Treasury
during the 2008 calendar year, with the Treasury basing its
checks on individuals’ 2007 tax returns. When filing their
2008 tax returns (in 2009), individuals will recalculate the
credit based on 2008 information, and can claim an additional
credit if the 2008 information increases the amount of the credit.
If the 2008 credit is less than that actually received,
individuals will not be required to pay the difference. (emphasis
believe that, in simple situations, not making taxpayers repay
the excess rebate makes sense. For example, a single individual
who filed a 2007 tax return with AGI of $72,000 will receive $600
in 2008. If his income increases significantly due to earning
a large year-end bonus in 2008, then the 2008 credit will be less
than the rebate amount. If, for example, his 2008 AGI is $78,000,
the credit would be only $450 because the $600 would be reduced
by 5% of ($78,000 x $75,000). In this case, the taxpayer is presumed
to have spent the $600, which was the original intention of the
A more complicated
scenario would be divorced or legally separated parents who have
an agreement that dictates “trading off” the dependency
exemptions. Specifically, it is not uncommon for parents to agree
that one year the former wife claims the child and, in the next
year, the former husband takes the deduction. The parent claiming
the deduction in 2007 will receive the $300 rebate in 2008. The
other parent, who will claim the child on the 2008 return, will
receive the credit for the 2008 return. In the authors’
opinion, not requiring parents in this kind of excess rebate situation
to repay the difference is problematic because these parents will
receive double the intended amount.
not requiring certain recipients to repay any rebate amounts if
their circumstances change will result in a number of situations
where the effects are not horizontally equitable. Because this
law was cobbled together quickly and is designed to pump disposable
income into the economy, it is intrinsically consistent with this
notion. Whether this is good tax policy or will accomplish the
desired objectives remains to be seen. Academic studies examining
the economic impact of the 2001 rebates indicate that such measures
may have little effect on the overall economy. [See Matthew D.
Shapiro and Joel Slemrod, “Consumer Response to Tax Rebates,”
American Economic Review, 93 (1), 2002.] We question whether the
same or better effect could have achieved with simpler measures,
such as a moratorium on federal fuel taxes, which would have been
easier to implement and would put money into circulation more
quickly at potentially far less cost to the government.
could arise for parties who legally separate or divorce during
the 2008 tax year. If the couple filed a joint return for 2007,
their rebate is based on their AGI and their filing status and
dependents as of 2007. Assume, for example, a couple with one
qualifying child. In 2007, one spouse earned $80,000 and the other
earned $25,000. They will have received a rebate of $1,500 in
May 2008. As a divorced or legally separated couple, one spouse
will likely file as head of household and claim the child, and
the other spouse will file as single taxpayer. If the single filer
earns more than $75,000 in 2008, the combined 2008 credit will
be less than the $1,500 rebate they received. Recently divorced
taxpayers may be unsure as to how to split the rebate. The IRS
addresses this issue by stating that if the rebate check was made
out in both of their names, the money should be split equally.
like the previous example of the divorced parents trading off
the exemption illustrate some of the new law’s problems.
Tax practitioners need to be aware of such issues because of potential
tax-planning opportunities, as well as the potential for future
clarifications and adjustments by the IRS. In this particular
case, if no adjustments are made, preparers may advise their divorced
or legally separated clients to trade off the exemptions for a
double benefit. It does not appear, however, that the IRS has
fully addressed these scenarios. We expect some revision and clarification
of the law once the IRS becomes aware of these kinds of situations,
because they are not uncommon and because the benefits are inequitable.
Tax preparers should be aware of the potential for updates and
changes, and should check the IRS website frequently for updates.
the Rebate and Credit for Low-Income Taxpayers
couples have another step to consider when maximizing their 2007
rebate or 2008 credit because the availability of the rebate or
credit depends on the type of the income, the AGI, and the net
tax liability before the credit.
3. Taxpayers C and D are married with no children.
In 2007, taxpayer C had AGI of $8,000, none of which was qualified
income, and taxpayer D had earned income of $12,000. If the couple
filed separately, taxpayer C’s taxable income is zero ($8,000
-- $3,400 -- $5,350 is less than zero), and her tax liability
is zero. She will receive no rebate because she has neither qualified
income nor a net tax liability greater than zero and AGI
exceeding $8,950. Taxpayer D’s taxable income will be $3,250
($12,000 -- $3,400 -- $5,350), and his tax liability will be $325
(10% of $3,250). He will receive a rebate check of $325 [the lesser
of the full rebate amount of $600 or the tax liability, but at
least $300, under IRC sections 6428(a) and (b)(1)(A)].
4. Assume that the same couple decides to file jointly
for 2008 and that their 2007 and 2008 incomes are the same. Their
taxable income will be $2,100 [$12,000 + $8,000 -- (2 x $3,500)
-- $10,900]. Their tax liability will be $210 (10% of $2,100).
Their credit will be $600: the lesser of $1,200 or their net tax
liability [IRC section 6428(a)], but at least $600 under IRC section
6428(b)(1)(A)]. After subtracting the amount received as rebate
in 2008 (see Example 3), they will receive a credit of $275 on
their 2008 tax return.
5. Assume the same couple from Example 4, except
that taxpayer C has $5,000 of earned income in 2008. C would have
no tax liability (same as in Example 3) but would receive a credit
of $300 [the lesser of $600 or the tax liability under IRC section
6428(a), but at least $300 under IRC section 6428(b)(1)(A)] if
she files separately for 2008. Taxpayer D would receive a credit
of $325, as shown in Example 3, meaning their combined credit
would be $625. In this case, filing jointly, as illustrated in
Examples 3 and 4, would result in a lower credit.
6. In 2007, Taxpayers E and F have AGI of $10,000
and $20,000 respectively (all of it earned); their combined AGI
is $30,000. If they file jointly, taxable income is $12,500 [$30,000
-- $10,700 --
(2 x $3,400)] and their tax liability is $1,250. In this case,
they receive the full rebate of $1,200. If they file separately,
however, E’s taxable income and tax liability are $1,250
($10,000 -- $5,350 -- $3,400) and $125 (10% of $1,250) respectively;
F’s taxable income and tax liability would be $11,250 ($20,000
-- $5,350 -- $3,400) and $1,296.25 [15% of ($11,250 -- $7,825),
plus $782.50]. Because the credit is partially refundable, to
a maximum of $300 for individuals not filing jointly, E’s
rebate would be $300. Taxpayer F, on the other hand, would receive
$600, meaning their combined rebate filing separately would only
show that various what-if situations need to be examined to maximize
the benefit. Situations become more complex when couples separate
during the year and then refuse to file joint returns in order
to maximize the rebate to each party, or when taxpayers have other
low-income credits available, such as the earned-income credit.
opportunities arise when couples did not choose the optimal filing
status in 2007 and are now considering changing their filing status
for 2008 in order to receive additional economic stimulus credit.
Moreover, some taxpayers’ income or filing situation may
have changed in 2008, which could provide for additional credit-maximizing
opportunities. As these examples show, some taxpayers may be able
to maximize the benefit by planning for their 2008 tax returns.
The following additional computations illustrate issues to consider.
Assume at least $3,000 of qualified income [earned income, Social
Security income, and certain veterans benefits, per IRC section
receive the maximum net benefit with either filing status when
the tax liability is zero, which is computed as follows:
If the tax
liability is $0, only the minimum rebate/credit ($600 for joint
filers and $300 for separate filers) is available. The net benefit
of filing jointly will be higher than the net benefit of filing
separately if the combined tax liability of filing separately
exceeds the joint tax liability. Consider, for example, a situation
where Taxpayer A earns $10,740, representing 60% of the total
involving low-income couples, the joint tax liability will never
be more than the separate tax liability. However, if the joint
tax liability is between $300 and $900 and the separate tax liabilities
are either more than $0 and more than $300 (or $0 and more than
$600), then filing separately will result in a higher net benefit.
Consider, for example, a couple with a combined AGI of $24,000
where one spouse earns $14,400, representing 60% of the couple’s
If the first
spouse earns 70% of the income, the net benefits of joint versus
separate filing compare as follows:
not least, the net benefit may also be affected by differences
in the marginal tax rate. Specifically, if, when filing separately,
the marginal tax rate of one spouse is lower than the joint marginal
tax rate, filing jointly will result in a higher net benefit.
these computations pertain solely to federal tax computations.
Filing separately under state tax law may increase the couple’s
state tax and negate the benefit of filing separately for federal
Tax Planning Issues
rebate is based on AGI, income items not included in AGI, such
as municipal bond interest, do not affect the amount of the rebate.
One planning approach is to have certain taxpayers switch from
taxable to nontaxable interest–earning accounts for 2008
to qualify for the 2008 credit. Another is to consider the potential
adverse effect that realizing a large capital gain in 2008 may
have on a taxpayer’s 2008 credit amount. In addition, the
IRS has not issued any guidance on the treatment of the rebate
amounts in connection with the alternative minimum tax (AMT).
relates to the taxation of the rebate or the credit for state
income tax purposes. At this point, no final conclusion can be
drawn, but it seems likely that many states will exclude the rebate
from state taxable income. For example, both houses of Iowa’s
state legislature decided on March 26, 2008, not to tax the stimulus
Missouri, two bills asking to exempt the rebate from state income
tax are pending as of this writing. Similarly, in New York and
Montana, the rebate checks are not taxable income, and individuals
who file a federal return solely for the purpose of receiving
the rebate check do not have to file a state individual income
tax return (New York State Department of Taxation and Finance,
2008). The Montana Department of Revenue explains further that
while the economic stimulus payment is not considered income for
state income tax purposes, the itemized deduction for federal
income taxes paid might be lower in 2008 (mt.gov/REVENUE/taxability.asp).
and Tax Policy: The Bigger Picture
economic effects of the rebate/credit program in the Economic
Stimulus Act are questionable. In addition, the rebate program
will be very costly to the government and certain individual taxpayers.
For example, a significant issue for many low-income beneficiaries
and Social Security recipients is the fact that they now have
to file a 2007 or 2008 income tax return, or both, to receive
the benefit. Many of these beneficiaries may not realize that
they have to do this to receive the stimulus check. The IRS is
aware of this problem and has made numerous announcements reminding
taxpayers and nonfilers who receive Social Security income that
they must file a return for the 2007 tax year in order to be eligible
for the rebate.
the IRS has provided for free filing of these returns on its website,
many potential recipients may not have Internet access. They may
need to use the services of a tax preparer unless they have access
to a local Volunteer Income Tax Assistance (VITA) program. The
IRS has made an effort to increase the availability of taxpayer
support for low-income and elderly taxpayers. Whatever solution
low-income and elderly taxpayers seek, there is further hidden
cost in the form of the time needed to gather the material to
prepare both of these returns. If they have to pay a tax preparer
as well, it may eat up much of the credit’s potential benefit.
Some eligible individuals may not have filed a return in many
years, which means getting reacquainted with the forms and current
technology. Although most of these issues apply to the 2008 filing
season, the authors foresee similar issues in 2009 when some nonfilers
who did not file a 2007 return—and therefore did not receive
a rebate check—will file a 2008 return in order to receive
couples who have a child in 2008 will not receive the $300 until
they file their 2008 tax return. First-time filers in 2008 will
also have to wait until 2009 before receiving the credit. With
regard to the latter situation, the IRS explains that individuals
who normally do not file a return must file a 2007 return in order
to receive the refund based on that return. To the authors’
knowledge, no provisions exist for new parents or low-income earners
who do not meet the minimum earnings threshold in 2007 but will
do so in 2008. For low-income families, especially those with
a newborn child, $300 is a significant amount. The IRS might consider
allowing the possibility of applying for advanced refunds for
should be aware that they may face awkward decisions when potential
beneficiaries under this rebate/credit plan come seeking advice.
Many of those seeking assistance may be unable to pay significant
fees. The preparer then needs to consider the possibilities of
referring these types of client to the IRS’s free website
or to the local VITA program. Alternatively, professionals may
choose to assist these clients on a pro bono basis or at a reduced
Pippin, PhD, is an assistant professor, and Richard
Mason, PhD, JD, and Charles Carslaw, CPA, MA,
are associate professors, all in the department of accounting and
information systems of the college of business administration at
the University of Nevada, Reno.