YOU ASKED, WE ANSWERED: Answers to Your Questions About Tax Rebates

Jan. 25, 2008— -- "World News" viewers submitted questions about tax rebates on our Web site. ABCNEWS.com personal finance columnist David McPherson provided his answers below.

Question: "I am looking for some clarification on the stimulus package. Will the government be looking at our 2006 or 2007 tax return to make the determination if we qualify for the rebate?"

Gordon from Kentucky

McPherson: The final details will depend upon on the final bill signed by President Bush, but as of now, the rebates are to be based on the 2007 federal tax return. That could be one more reason to get your return done early this year. But remember, Alternative Minimum Tax relief passed by Congress in December was already expected to delay the processing of some 2007 tax returns this year. If the rebates become law, then the IRS will have even more work to do during an already busy time of year.

Question: "How will the president's tax rebate work for families with a stay at home mom? Does the 'working couple' apply to them, or will the family be punished for having a mom be a mom and stay home with the children? Thank you"

Shari from California

McPherson: According to examples provided by the Treasury Department, the rebates depend on a married couple's joint adjusted gross income, not on whether both parents are working. For instance, a married couple with two children and an adjusted gross income of $80,000 and income tax paid in excess of $1,200 would receive a total rebate of $1,800: $1,200 for the couple and $600 for the two children.

Question: "Tonight Charles Gibson announced the plan for economic relief with 170 million 'tax payers' receiving fed. money. In all of the relief plans tossed about, one segment of the population has been ignore. Senior citizens, retirees who can no longer work, on limited incomes. Is nothing being done for seniors?"

Melanie from Indiana

McPherson: Melanie, retirees would qualify for the rebates to the extent they pay taxes on pensions, investment income, Social Security and other sources of income. They would not qualify under the current proposal if their adjusted gross income is so low that they pay no federal income tax at all and their earned income in 2007 was less than $3,000.

Earned income includes money earned on the job or in a business. According to the IRS, it also includes union strike benefits, long-term disability benefits received prior to retirement age and any nontaxable combat pay received by military personnel.

Forms of unearned income include investment interest and dividends, pension payments, Social Security benefits, unemployment benefits, alimony and child support.

Just remember that even though there is a political agreement on this proposal, it will not be final until it is passed by Congress and signed by the president.

Question: "I am wondering if the stimulus package rebates that are now proposed will be given to illegal immigrants as well as US citizens. This has not been mentioned in any reporting. I am also concerned with the idea of mailing all of these checks. Thieves are already in our mailboxes. Any reports will be welcome. Thank you."

Gerri from Texas

McPherson: The tax rebates will be administered by the IRS. That means they will be sent only to taxpayers with a Social Security number who paid federal incomes taxes in 2007. Anyone working "under the table" and not reporting their income would not qualify for a rebate.

Question: "why does a disabled veteran like me not be included in the tax rebate plan being passed??? I'm on social security as well and oh ya I'm left out there too, and oh yah I get no tax credit for my 2 children...am I part of america anymore or just forgotten about????? something to talk about that no one else will, be the first please...."

Tony from Michigan

McPherson: Tony, I can't speak to the rationale behind the plan, only how it is supposed to work. As it stands now, the rebates are tied to earned income and federal income taxes paid. If you pay no taxes and had no earned income in 2007, then you would not qualify for the rebate.

The key questions for you: Do you pay federal income taxes on any disability benefits you receive? Or are any of your benefits classified as earned income?

Earned income is basically money earned on the job or in a business. That's why the news coverage talks mostly about "workers." Earned income does not include investment income, pension payments, unemployment benefits or Social Security payments.

According to IRS rules, however, earned income does include long-term disability benefits received before retirement age. Not knowing exactly what kinds of benefits you receive, I can't say if your disability benefits would qualify for a rebate. But if they qualify as earned income or you pay federal income taxes on those benefits, you may be eligible.

Question: "The recent fed rate cut was great. However, we are seeing a trend with some mortgage lenders (i.e., Suntrust and other large groups) that are not passing along the rate reduction to the consumer but instead are hording the profits from the "cheaper money" to make up for some of the recent foreclosures they have experienced and increase their bottom line. It is the general public that needs the help not the big corporations. Perhaps this should be monitored and corrected."

Elizabeth from Virginia

McPherson: The impact of the Fed rate cut on an individual borrower depends on the type of loan and the payment schedule. Interest rates on many home equity lines of credit and variable rate credit cards will go down, but it may take a few weeks for the lower rates to kick in, depending on your payment schedule. These types of loans often are tied to the Prime Rate, which has come down as a result of the Fed action. A borrower with an existing fixed-rate mortgage would see no impact from the Fed rate cut.

Mortgage rates are influenced by market interest rates, most notably the 10-year Treasury note. Even before the Fed's action, mortgage rates had been falling and are now at their lowest levels since 2004. A homeowner with a fixed-rate loan would need to refinance to take advantage of the lower mortgage rates.

Question: "Everyone is talking about the economic stimulus package, but no one has said anything about the income limits and which year's tax forms will be used to determine whether one receives the rebate or not. What are the income limits for singles, married couples, etc...? At one point, someone did mention $110,000. If that is the income limit, then which tax year's forms will be used...2006 or are they waiting for everyone to file 2007's?"

Connie from Georgia

McPherson: The tax rebates will be based upon your 2007 adjusted gross income, which is the figure listed on the last line of the first page of your tax return. This tells me the payments will not be sent out until after the IRS has received and processed your 2007 federal tax return. It also tells me it will be in your interest to get your tax return sooner rather than later.

As for the income limits, they work this way:

Single filers with adjusted gross income up to $75,000 will qualify in full for the tax rebates. Above $75,000, the rebates will begin to phase out $50 for every $1,000 in AGI.

Married couples with AGI up to $150,000 qualify in full. Above $150,000, the rebates start to phase out at the same rate, $50 for every extra $1,000 in AGI.

Keep in mind, none of this is set in stone until both the House and Senate pass the economic stimulus package and President Bush signs it. So everything is still subject to change.

Question: "Tax rebate. Sounds good on the surface but last time Bush and company gave us a rebate we had to deduct it as income on our taxes the following year. Smoke and mirrors people, smoke and mirrors. This is a temporary fix in an election year, nothing more. The only real fix is to dump the present tax system and make Washington stop spending like drunken sailors on leave. It's not their money, it's ours. I guess as long as we continue to re-elect the same losers we can expect more of the same."

Linda from Florida

McPherson: Linda, The tax rebate as proposed actually amounts to a tax cut on your 2008 income even though it is based on 2007 figures. The proposal calls for cutting the federal income tax rate on the first $6,000 in income for individuals and the first $12,000 for couples from the current 10-percent rate to zero percent.

The rebate proposal assumes you are having federal income taxes withheld from your paycheck now based on the current 10-percent rate. Think of the tax rebate actually as an advance on next year's tax refund.

All the details remain to be worked out, but I think it's safe to assume any tax rebates received this year will come into play when completing your 2008 return in early 2009.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass.

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