Last year, much confusion surrounded the recovery rebate credit; many errors were made on these returns (for 2008) because of the public’s lack of awareness on how to handle the rebate and/or the rebate credit.
Rebate Checks: Non-taxable
Some taxpayers were eligible for a lump sum rebate of $600 ($1200 for those filing jointly), plus an additional $300 for each eligible dependent. These funds were and are, nontaxable. However, according to the IRS, some 2008 filers entered the rebate amount as “other income”. The amount of the check, however, shouldn’t show up on the return at all.
Rebate Recovery Credit: Who Qualifies?
Then there’s the rebate credit, which caused even more confusion. The vast majority of taxpayers were ineligible for the credit, yet many took it. For most Americans, the line attributed to the recovery rebate should be left blank.
Specifically, the credit was to be taken by taxpayers who were eligible for rebate checks, but did not receive them. Some filers were eligible for part of the credit rather than the maximum amount; if they didn’t receive checks, these taxpayers were allowed to take the credit in the amount of what they were eligible for.
For example, those with adjusted gross incomes of $75,000 ($125,000 for married couples) and above qualified for either smaller checks, or none at all. These taxpayers should consult with their tax preparer or their tax preparation software to determine eligibility. If they DO qualify, they are allowed to take a credit in the amount of what they are owed, but did not receive.
Additionally, those who had a change in status, such as the birth or adoption of a child, may be entitled to more stimulus money in the form of a credit.
Confusing? Absolutely; according to the IRS, roughly 15% of all 2008 filers made a mistake regarding either their stimulus checks, or the recovery rebate credit.
Rebate Checks as Economic Catalyst
The purpose of the recovery rebates was to encourage the public to spend the extra funds, and thus, stimulate the sluggish economy. However, many Americans used the money to pay down existing debt; such expenditures, while important, don’t inject the system with new monies.
As a result, Congress enacted the Make Work Pay Credit, which allows taxpayers to take home bigger checks each pay period by lowering the amount of withholding taken from their checks. These increases, rather than a lump sum, will hopefully encourage Americans to spend the extra money, rather than to pay down debt with it. Doing so will give system a much needed shot in the arm.