CONFUSION ABOUNDS

We have received a number of inquiries regarding how the Economic Stimulus Payments received in the summer of 2008 effect the Recovery Rebate Credit on your 2008 return.  Many taxpayers have gotten the false impression that the IRS is taking back the money they gave you in your Summer 2008 stimulus payment check. This misconception is partly due to a less-than-stellar performance by the IRS in explaining how the whole thing works and partly due to poor wording in some of the tax software being used by taxpayers trying to do their own taxes.

HOW DOES THE WHOLE REBATE CONCEPT WORK?

In early 2008 the government decided it needed to stimulate the economy.  It decided to do this by cutting your 2008 tax bill.  The problem with this was that you wouldn't receive your 2008 tax refund until the spring of 2009 (i.e., your 2008 return wasn't  due until 4/15/09).  Since the government wanted to get the cash into taxpayers' hands much earlier so they could spend it and hopefully create jobs, they decided to give everyone an "advance" on the credit.  This "advance" was in the form of all those stimulus payment checks that were mailed or direct deposited in the summer of 2008.

So far, so good.  But here's where the confusion starts. If the actual credit is based on your reported 2008 income, how could the IRS figure out how much to send you since it was only the summer of 2008 but the amount was based on your reported 2008 income (your 2008 tax return which wasn't  due until April 2009)?  Their solution was to use your 2007 return as a sort of substitute to estimate your 2008 income and base the rebate on that instead in order to get the checks into people's hands right away.

Everyone gets their checks in the summer of 2008 and smiles.

New Years 2009 arrived and everyone needed to file their 2008 tax returns (the smart ones went to Cooke & Company to get their taxes done).  Preparation of your 2008 tax return included calculating the Recovery Rebate Credit based on your 2008 income.  For most taxpayers the amount calculated was the same as the estimate based on their 2007 income tax return numbers which they received as a stimulus payment check in the summer of 2008.  Since you are only entitled to one rebate, the Recovery Rebate Credit calculated on your 2008 return was reduced by the "advance" on the rebate that you already received in the summer of 2008.  This reduced the 2008 credit to zero in most cases.  There were of course exceptions (adding a dependent in 2008, higher qualifying income in 2008, etc.), but all of them would have increased your credit and therefore your refund.

THE BOTTOM LINE 

This does not mean that the government is taking back the money they gave you in the summer of 2008.  It's just a matter of having already received the money "in advance" the prior summer so you're not entitled to double-count and receive another payment as part of your 2008 return.  Unfortunately many taxpayers misinterpret this as the government taking back the money. The only reason you need to adjust for the amount of the rebate you received in the summer of 2008 is to avoid double-dipping on the rebate. It is not taking the money back, nor is it being taxed as income.

If your "normal" refund not counting the effect of either the Stimulus Payment or the Recovery Rebate Credit was $1,000 and your situation did not change between 2007 and 2008 (e.g. you haven't added any dependents etc.) your refund will still be $1,000.

WHAT IF REBATE CALCULATIONS BASED ON 2007 AND 2008 INCOME FIGURES WERE DIFFERENT?

So why did everyone have to jump through all these hoops if the actual rebate is the same as the advance payment?  The answer is that the amounts are not always the same.

Some taxpayers saw their 2008 tax refund (which should have been received in Spring 2009) increased or their 2008 tax owed decreased due to the Recovery Rebate Credit.  Reasons for this include:

• Additional qualifying dependent children on the 2008 return.
• Taxpayers who qualify for the maximum rebate based on their 2008 income but didn't qualify for the full amount earlier due to their 2007 income being too high or too low. 
• Taxpayers who did not receive the rebate due to not filing a 2007 return before IRS stopped processing stimulus payments (including those who took advantage of the delayed 1/5/09 filing deadline because of Hurricane Ike).
• Individuals who were claimed as someone else's dependent in 2007, but were not claimed as a dependent in 2008.

If the stimulus rebate you received was more than what the 2008 Recovery Rebate calculates out to be, don't worry, you do not have to pay it back, nor is it taxable income.

preparing your 2008 form 1040

We have published this page as a public service. 

While we welcome questions from our paying clients, we cannot answer inquiries regarding this topic from the general public as that would take away from our time serving our valued clients.  We suggest that you contact your own tax preparer with any questions regarding this topic (assuming it is not a software box, as it would look really odd to be talking to a box). If your current tax preparer can't or won't answer your rebate/stimulus payment questions you should strongly consider switching to a professional tax advisor.

If you aren't getting the service you deserve from your current tax preparer or have decided that you need the services of a licensed tax practitioner, please contact us to arrange an appointment for our professional services at a reasonable cost.