A Second Chance for Tax Rebates in 2009

The fine print of the stimulus package gives excluded taxpayers another crack at the money next year.

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Don't jump to the conclusion that you won't qualify for the tax rebate approved by Congress late Thursday night.

The fine print in the legislation includes arcane provisions that may let people who are disqualified from receiving a stimulus check this year because their 2007 income was too high get a second crack at the money next year.

And some people whose income is too low to qualify for a rebate may get another chance to qualify next year, notes Bob Scharin, a senior tax analyst at Thomson Tax & Accounting, a provider of tax information and software.

Procedural details and factors are still to be worked out by the Internal Revenue Service, but the core issue is that the checks to be mailed out this year starting in May are a rebate of 2008 income tax, but based for expediency's sake on 2007 income. When 2008 tax returns are filed next year, there will be a reconciliation between any rebate paid or disallowed this year and an individual's income or tax for 2008.

The formulas for determining a specific rebate can include calculations involving income, employment earnings, Social Security benefits, and tax paid. The bottom line can be as much as $600 per person or $1,200 for a married couple, plus $300 for each child in a family under age 17.

The rebate will also phase out quickly once adjusted gross income tops $75,000, or $150,000 for a couple filing jointly.

It will be a one-way street in the right direction. People who qualify for a rebate based on 2007 income or tax paid won't have to give any of it back if their 2008 situation would disqualify them. But people who would be eligible based on 2008 figures, but not on those for 2007, can get the rebate as a credit on their 2008 tax return.

For many taxpayers, qualifying for the rebate will be automatic and a no-brainer. Others, though, may have to dig through the complexities to determine their situation.

Analyst Scharin says the complex implementation allows room for some strategic tax planning this year. Among his suggestions:

• If you are just above the gross income ceiling based on 2007 income, you can try to reduce that amount this year. You would benefit from both lower overall 2008 tax and qualifying for the rebate. Adding money to a 401(k) or selling doggy investments at a loss are two ways to lower adjusted gross income.

• If you are barred from the rebate because your job income is too low, you could try to boost that amount just a bit over the $3,000 threshold.

• If you are barred because you aren't liable for any income tax and don't have at least $3,000 of job income, you may be able to qualify by cashing in retirement savings, selling assets, or otherwise increasing your gross income so that you pay at least $1 of tax.

This is going to be yet another tax enigma for many people—and a tactical field day for tax advisers.