Tax Rebate Checks as Economic Stimulus
Consequences of the Economic Stimulus Act of 2008 for Individual Taxpayers

By Sonja Pippin, Richard Mason, and Charles Carslaw

E-mail Story
Print Story
AUGUST 2008 - 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)].

The rebate’s amount and eligibility are limited as follows:

  • Phase-outs 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].
  • Minimum 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.
  • Ineligible 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)].

The intention 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 number.

Reconciliation of Rebate and 2008 Tax Credit

In order 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.

Taxpayers 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.

Example 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.

Example 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.

Neither the 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:

The tax 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 added)

The authors 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 law.

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.

More generally, 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.

Similar problems 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.

Situations 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.

Maximizing the Rebate and Credit for Low-Income Taxpayers

Lower-income 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.

Example 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)].

Example 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.

Example 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.

Example 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 be $900.

These examples 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.

Tax-planning 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 6428(e)(1)].

Taxpayers receive the maximum net benefit with either filing status when the tax liability is zero, which is computed as follows:

Separate: A/B
Gross income $17,900 $8,950/$8,950
Taxable income $0 $0/$0
Tax liability $0 $0/$0
Rebate/Credit $600 $300/$300
Net benefit $600 $600

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 income:

Separate: A/B
Gross income $17,900 $10,740/$7,160
Taxable income $0 1,790/$0
Tax liability $0 $179/$0
Rebate/Credit $600 $300/$300
Net benefit $600 $421

For situations 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 total income:

Separate: A/B
Gross income $24,000 $14,400/$9,600
Taxable income $6,100 $5,450/$650
Tax liability $610 $545/$65
Rebate/Credit $610 $545/$300
Net benefit $0 $235

If the first spouse earns 70% of the income, the net benefits of joint versus separate filing compare as follows:

Separate: A/B
Gross income $24,000 $16,800/$7,200
Taxable income $6,100 $7,850/$0
Tax liability $610 $785/$0
Rebate/Credit $610 $600/$300
Net benefit $0 $115

Last but 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.

Note that 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 purposes.

Additional Tax Planning Issues

Because the 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).

Another question 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 checks. In 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 (

Economic and Tax Policy: The Bigger Picture

The possible 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.

Although 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 the credit.

Finally, 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 new dependents.

Tax preparers 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 rate.

Sonja 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.




















The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices