Tips to Avoid Recovery Rebate Credit Confusion

In response to errors showing up on early tax filings, the Internal Revenue Service today urged taxpayers and tax preparers to make sure they properly determine eligibility for the recovery rebate credit before they file their 2008 federal tax returns.

Some individuals who did not get the economic stimulus payment, and a smaller number of those who did, may be eligible for the recovery rebate credit. However, most taxpayers who received the economic stimulus payment last year will not qualify for the recovery rebate credit on their 2008 federal income tax return.

An early sampling of tax returns shows about 15 percent have errors involving the recovery rebate credit. Some tax returns erroneously claim the credit, do not claim the proper amount of recovery rebate credit or mistakenly enter the amount of the stimulus payment they received on the recovery rebate credit line.

To avoid delays in tax refunds, it is critical that taxpayers know the correct amount of the stimulus payment they received last year, if any, to help determine whether they qualify for the recovery rebate credit now.

The amount of the stimulus payment will not be entered directly on the tax return. For people using a paper tax return, the stimulus payment amount will be required when completing a related worksheet. For people using tax software, the stimulus payment amount will be needed as part of the return preparation process.

How to Get the Recovery Rebate Credit Right

The IRS sent taxpayers nearly 119 million stimulus payments last year. There are three ways individuals can find out how much they received:

Check the amount listed on Notice 1378, which the IRS mailed last year to individuals who received the economic stimulus payment.

Go to the How Much Was My Stimulus Payment? tool that is available on the IRS Web site, IRS.gov. This can provide the correct amount in a matter of a few seconds.

Individuals can call the IRS at 1-866-234-2942. After a brief recorded announcement they can select option one to find out the amount of their economic stimulus payment. They will need to provide their filing status, Social Security Number and number of exemptions.

With the amount of last year’s economic stimulus payment in hand, the taxpayer can then enter the figure on the recovery rebate credit worksheet or in the appropriate location when tax preparation software requests it.

If the taxpayer or preparer is using tax software, the amount of the rebate recovery credit will automatically be calculated and reported properly. If the taxpayer is using the paper method, the rebate recovery credit, as determined through the worksheet, should be reported on Line 70 of Form 1040, Line 42 of Form 1040A or Line 9 of Form 1040EZ.

For most taxpayers, the correct entry for the recovery rebate credit will either be blank or zero.
If there is any question at all as to the amount that should be reported for the recovery rebate credit, the taxpayer or preparer should enter a zero on the appropriate line above, and the IRS will determine whether a recovery rebate credit is due, and, if so, how much.

Some of the major factors that could qualify you for the recovery rebate credit include:
Your financial situation changed dramatically from 2007 to 2008.

You did not file a 2007 tax return.
Your family gained an additional qualifying child in 2008.
You were claimed as a dependent on someone else’s return in 2007 but cannot be claimed as dependent by someone else in 2008.

Stimulus Payments Not Taxable; Reports of Extensive Refund Delays False

The IRS has received a number of recurring questions involving stimulus payments and the recovery rebate credit. Here are some important tips to keep in mind:

Taxability. The economic stimulus payment is not taxable and it should not be reported as income on the 2008 Form 1040, 1040A or 1040EZ.

Refund delays. IRS personnel are aware of reports that errors in claiming the recovery rebate credit could delay tax refunds for as much as eight to 12 weeks. These reports are false. As the IRS detects and corrects return errors concerning the recovery rebate credit, refund delays are currently no longer than about one week.

One payment. In addition, the IRS notes taxpayers will receive a single refund that includes any recovery rebate credit to which they are entitled. The IRS will not be issuing separate recovery rebate credit payments.

Refund amounts. The IRS reminds taxpayers they should not use their regular refund from last year in calculating the recovery rebate credit. Some taxpayers may be confusing their regular tax refunds with the economic stimulus payment they received when completing their 2008 tax return.

Direct Deposit Requests. Taxpayers who request a direct deposit will receive the refund in the form of a direct deposit even if errors are detected.

For more information, visit the Recovery Rebate Credit Information Center as well as the rebate questions and answers.

Recovery Rebate Credit Errors

Most taxpayers who received the economic stimulus payment last year will not be able to claim the Recovery Rebate Credit on their 2008 federal income tax returns. A small number of taxpayers who did not receive the full economic stimulus payment last year may be eligible to claim the Recovery Rebate Credit on their 2008 federal income tax return. Figuring the Recovery Rebate Credit incorrectly or entering inaccurate information will delay the processing of your tax return and any refund due.

Below are the four things every taxpayer should know about this one-time credit, which is related to last year’s Economic Stimulus Payment:

1. You do not have to pay back your Stimulus Payment and the payment is not taxable.

2. Less than an estimated 3 percent of taxpayers are eligible. The vast majority of taxpayers are not eligible to receive the Recovery Rebate Credit.

3. Did you have a major life change? If so, you may be eligible to claim the Recovery Rebate Credit. Some of the major factors that could qualify you for the Recovery Rebate Credit include:

Your financial situation changed dramatically from 2007 to 2008.
You did not file a 2007 tax return.
Your family gained an additional qualifying child in 2008.
You were claimed as a dependent on someone else’s return in 2007, but cannot be claimed as dependent by someone else in 2008.

4. Any Recovery Rebate Credit amount will be included in your refund. The IRS will figure the credit for you and include it in your refund or put it toward any taxes owed.

Recovery Rebate Information Center

Upcoming Tax Changes for the 2008 Filing Season

The IRS has published changes in legislation which may affect your taxes this year. And let’s admit the inevitable, in a time of recession and economic hardships for all classes of taxpayers, we could all use some tax breaks for the coming filing season.

Take some time to look through the following changes and see if any of these will affect your tax liability reduction.

Additional Child Tax Credit

The income threshold for the Additional Child Tax Credit has been lowered to $8,500 for tax year 2008 only.

0% Capital Gain

The 5% net long-term capital gain rate drops to 0% for those taxpayers who are in the 10% or 15% tax brackets.

Real Property Tax Deduction

Non-itemizers may claim an additional standard deduction for state and local real property taxes paid. The maximum deduction is $500 ($1,000 MFJ).

Refundable First-time Homebuyer

Credit Taxpayers who purchased a principal residence after April 8, 2008, through June 30, 2009, and who have not owned a principal residence in the previous 3 years may claim a refundable credit for 10% of the purchase price. The maximum credit is $7,500 ($3,750 MFS). Eligibility for the credit phases out for modified AGI between $75,000–$95,000 ($150,000–$170,000 MFJ). Note: The credit must be repaid in 15 equal installments starting in 2010. Repayment is accelerated if the home is sold or no longer used as a principal residence.

Recovery Rebate Credit

The rebate that was paid in 2008 will be reconciled on the 2008 tax return. Taxpayers will receive any additional credit due, but don't need to repay any excess credit received.

Kiddie Tax

Kiddie tax now applies to children who are younger than 18, children who are 18 unless they provide more than half of their own support based on earned income, and children who are 19 to 23 and full-time students — unless they provide more than half of their own support based on earned income.

Depreciation

The maximum Section 179 deduction for tax years starting in 2008 has been increased to $250,000. A phaseout of this amount starts when more than $800,000 of qualifying property is placed in service during the tax year. Additional first-year 50% "bonus" depreciation is the default provision for property placed in service in 2008.