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Courtney Smith PureMatter Brand Marketing & Interactive 408.297.7800 courtney@purematter.com

Karen Yang Ireland San Filippo, LLP 408.350.1937 kyang@isfllp.com

Dear Client,

You've probably heard or read that the government will be sending rebate checks to most Americans in an effort to stimulate the economy.   This update will explain, among other items, who gets the rebates, how they are calculated, how higher income can reduce or eliminate a rebate, and what, if anything, you'll need to do to get one.

Who is eligible for a rebate?
Only individuals are eligible for the rebates.  Business entities, estates and trusts don't get them (although there are other new tax breaks for businesses).  Eligible individuals are those who have not and can not be claimed as someone else's dependent, and who are not a nonresident alien or an illegal immigrant.

Does that mean all other individuals will receive a rebate?
No - to get a rebate, in general, for 2007, you must either (1) owe tax as computed in a special way or (2) have at least $3,000 of qualifying income— generally earned income, social security benefits, and veterans' disability payments (including payments to survivors of disabled veterans).

How much is the rebate?
A single person with no qualifying children gets a maximum rebate of $600 or a minimum rebate of $300.

A married couple filing jointly with no qualifying children gets a maximum rebate of $1,200 or a minimum rebate of $600.

To receive the maximum rebate, your 2007 tax (figured in a special way) must be $600 or more for a single person and $1,200 or more for a married couple filing jointly. To receive the minimum rebate, you must have at least $3,000 of qualifying income (as explained above) or owe tax (figured in a special way) of at least $1.  If your tax is more than $300 but less than the maximum rebate for your filing status, your rebate amount will fall in between the minimum and maximum.  In that case, your rebate will be equal to your tax.  For example, you are single and your tax is $500. You will get a rebate of $500.

Increased rebates for those with one or more qualifying children.
Anyone who qualifies for a rebate of any amount will receive an additional $300 for each qualifying child.  To qualify, the child must be under the age of 17, live with you for more than half of the year and be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any such individual.  In addition, the child must not have provided more than half of his or her own support.

Example: a married couple filing jointly with two qualifying children could be eligible for a maximum rebate of $1,800.

How does higher income affect a potential rebate?
The amount of the rebate (both the basic and the child's amount) is reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns).

Example: a married couple filing jointly with no children has AGI of $160,000, and net tax liability of over $1,200.  Their rebate is $700: [$1,200 basic rebate − $500 phaseout (i.e., 5% × ($160,000 − $150,000)].

What do I have to do to get the rebate check?
Nothing. The IRS will automatically figure your rebate based on your 2007 tax return that is due April 15, 2008.  It will start sending rebate checks out in May for those who file before then.

What if I’m not required to file a tax return?
Many people who aren’t otherwise required to file a return will have to do so in order to receive their rebate check.  For example, an individual whose only income is $3,000 of earnings normally would not be required to file a return.  Likewise, an individual whose entire income consists of $8,000 of social security benefits normally would not have to file a return.  These individuals should file either Form 1040 or Form 1040A to show the IRS that they meet the $3,000 qualifying income threshold.  No income taxes will be due as a result of filing.  They should enter on Line 20a of Form 1040 or line 14a of Form 1040A the following benefits in any combination:

... Social security benefits reported on the 2007 Form 1099-SSA, which should have been received in January 2008.
... Railroad retirement benefits reported on the 2007 Form 1099-RRB, which should have been received in January 2008.
... The sum of veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans' Affairs in 2007.

Do rebates affect 2008 taxes?
The rebate that the IRS will send you after you file your 2007 return usually won't affect your 2008 taxes on the return that you file in 2009.  However, it can.  When you calculate your 2008 taxes, you will determine what the rebate would have been based on your 2008 taxes.  If the amount is higher than the check you received from the IRS in 2007, you will get a credit against your 2008 taxes for the difference.  It if is lower, you will not be required to pay the difference back.

We hope this information is helpful. If you would like more details about this, please do not hesitate to call your Ireland San Filippo tax team.

Very truly yours,                  

Ireland San Filippo, LLP

For additional information, please contact Karen Yang by phone at 408.350.1937, by email kyang@isfllp.com or on the web at www.isfllp.com. 

June/July 2006 CPA Magazine Born to be Wild Accountants