If you thought that the tax legislation passed at the end of 2007 — both the Alternative Minimum Tax relief legislation and the mortgage debt forgiveness relief legislation — finally resolved the issues that would have to be addressed for the 2007 tax return filing season, you were mistaken. Congress was not done creating issues that would impact those returns. The Economic Stimulus Act of 2008, signed by President Bush on Feb. 13, 2008, has created additional issues for 2007 return filers.Most of the direct impact will be on lower-income individuals — individuals who are not normally required to file tax returns but who may wish to do so in order to qualify to receive a rebate check authorized under the new legislation.
Tax return preparers will encounter a number of additional issues, however, involving those entitled to rebate checks based on 2007 return information, many of which are just starting to be identified. There may also be some planning opportunities with respect to people who file a tax return but do not have a tax liability. Even some of the business-directed provisions impacting 2008 could have an indirect impact on decisions made with respect to filing the 2007 return.
THE CREDIT AND THE REBATE
The legislation creates a new recovery rebate credit effective only for 2008. Individuals with a tax liability will be entitled to a credit not to exceed that liability of up to $600 ($1,200 for joint filers). Alternatively, individuals can qualify for a minimum credit of $300 ($600 for joint filers) if they have at least $3,000 of any combination of earned income, Social Security benefits, or certain veteran’s benefits, or if they have at least $1 of tax liability and gross income that exceeds their standard deduction plus one exemption (two for joint filers). In addition, anyone qualifying for the basic credit will be entitled to an additional credit of $300 for each qualifying child under the age of 17.
Some categories of individuals are expressly excluded from entitlement to the credit: dependents (whether actually claimed or not), persons without Social Security numbers, and non-resident aliens. There is also a phase-out that commences at adjusted gross incomes over $75,000 ($150,000 for joint filers) equal to 5 percent of the amount by which adjusted gross income exceeds these threshold amounts. The AGI at which the credit it totally phased out will depend on the size of the credit to which the individual is entitled.
In order to provide immediate stimulus to the economy, the legislation directs the IRS to issue rebate checks to anyone entitled to a 2008 credit by looking to see the credit the individual would have been entitled to if the credit had applied to their 2007 return. If the credit on the 2008 return proves to be larger than the rebate check based on the 2007 return, the individual can claim the balance of the credit on the 2008 return. If the 2008 credit proves to be less than the rebate check, the individual can keep the difference.
2007 RETURN REBATE ISSUES
There are many taxpayers who have $3,000 of earned income, Social Security benefits or veteran’s benefits who may not be required to file a tax return in 2007. The IRS has decided, however, that, rather than try to get lists from the Social Security Administration and the Veterans Administration or checking W-2s, only individuals who file a 2007 return will receive a rebate check. The IRS has devised a special Form 1040A for these individuals to file basically an information-type return; however, it appears that this return can only be filed as a paper return. Notice 2008-28 explains in detail the manner in which the return is to be prepared.
Many tax software programs are designed to permit the filing of a tax return even where under the law one does not appear to be required; however, there may be some software programs that do not permit this.
Also, there appears to be some question whether the IRS system will accept e-filed returns with only this information. One major issue will be getting the word out to people, especially senior citizens who have not had to file a tax return for many years, that they should file a return for 2007 in order to get a rebate check. Included in this list of individuals potentially qualifying for a rebate check if they file a 2007 return are individuals who passed away in 2007.
There may be other taxpayers who have income from sources such as investments or private pensions, but not from earned income, Social Security or veteran’s benefits, who have enough deductions and credits to have a zero tax liability. There may be some planning opportunities for these individuals to pass up the full amount of a deduction or credit to which these individuals are entitled to create a token 2007 tax liability. Such a token tax liability could qualify the individual for a rebate check of $300 ($600 for joint filers) plus $300 for each qualifying child.
Rebate checks will be directly deposited if the direct deposit refund option is chosen on the 2007 tax return. The selection of the direct deposit option and the accounts selected, therefore, particularly direct deposits used to fund IRA accounts, should take into account the possibility of the deposit of the rebate check to avoid any issues of over-funding retirement accounts. Taxpayers can fill out the direct deposit information on the return even if they are not due a refund for 2007. Taxpayers who elect to split their refund between more than one account would receive a paper check, rather than a direct deposit. Taxpayers who have a refund deposited under a refund anticipation loan arrangement will also receive a paper check.
Divorced taxpayers who normally alternate years in which they claim the child tax credit will have to deal with the issue of whether the individual receiving the rebate check based on the 2007 returns has to in some way share with the individual who would have been entitled to the credit based on the 2008 returns. The same issue arose with the rebate checks in 2003 based on the increase in the child tax credit. It is possible that some taxpayers got away with claiming both the rebate check in one year on one taxpayer’s return and the credit on the other taxpayer’s return the following year. The IRS had indicated that they could trace the Social Security numbers of the child from one return to another from year to year, but it is unclear whether they in fact did so.
There was some confusion whether a qualifying child was eligible for inclusion in a rebate check if the child was under age 17 as of Dec. 31, 2007, but would not be as of Dec. 31, 2008. The IRS has clarified that such a child will be a qualified child for purposes of the rebate checks.
EFFECTS ON BUSINESS
The economic stimulus legislation also included a substantial increase in the limits available under the Code Section 179 expensing election and a new election for first-year 50 percent bonus depreciation. The Code Section 179 expensing limit for tax years commencing in 2008 is increased to $250,000, and the asset threshold is raised to $800,000. The 50 percent bonus depreciation applies to certain property acquired in 2008, including property with a depreciation period of 20 years or less, certain water quality property, or qualified leasehold property.
The property generally must be placed in service in 2008, although certain property may also be placed in service in 2009, including 10-year or longer recovery property, transportation property, and certain aircraft.
The availability of these significant depreciation opportunities in 2008 may affect depreciation choices that are being made on the 2007 return. The Code Sec. 179 changes are effective for tax years beginning after Dec. 31, 2007. Many fiscal-year taxpayers will still have a chance to choose whether to postpone purchases to the year when the new limits become effective to take advantage of the new Code Sec. 179 limits, even though the intent of the law was to accelerate purchases.
The effective date for bonus depreciation is tied to Jan. 1, 2008, rather than to a particular tax year. It will generally be the case that taxpayers will want to maximize depreciation on the 2007 return regardless of the situation in 2008; however, a close analysis of income and expense projections and loss carryovers and carrybacks may indicate a contrary choice in particular circumstances. Also, bonus depreciation is specifically allowed for Alternative Minimum Tax purposes, while other forms of accelerated depreciation may not be. Tax return preparers will want to weigh the AMT impact of their depreciation elections as well.
With the tax-filing season already underway, the Economic Stimulus Act of 2008 is adding further issues for tax professionals to consider with their clients. Some clients who filed early may even want to consider amended returns to engage the requirements for rebate checks based on 2007 tax returns.
Most taxpayers will find that the rebate checks are properly accounted for by the usual process of filing their returns and paying their taxes. For taxpayers in particular situations, however, a little planning can greatly improve the tax outcome.
George G. Jones, JD, LL.M, is managing editor and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst at CCH, a Wolters Kluwer business.
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