(This is lenghty and some of it is off the top of my head, so if I've misrepresented any of the facts, someone please correct me. If you think I've misrepresented any of the politics or opinions, well we will just have to disagee because I ain't changing my mind)
I did a little quick research on the history of "Rebates" to try and figure out how this one will play out. (Although past performance is no guarantee of future results) Here is what I came up with:
1975: Gerald Ford Admin: Rebates of $100 - $200 were sent to each household. There was no repayment, reporting, or other follow-up required.
2001: George Bush Admin: Rebates of $300 - $600 were sent out as an "Advance Payment" of the anticipated reduction of the lowest tax bracket. Reducing the tax bracket from 15% to 10% meant that every taxpayer saw a reduction of their total tax due by this amount so the government sent it out early as a "stimulus" (as well to buy political favor). It was a bit of a problem because it had to be taken into account on the 2001 return filed in 2002, but the fact is people did get the money. Some were just too financially challenged to understand the math, and it did cause some proiblems for preparers (although I don't recall it being a major issue). Interestingly, we should keep in mind that every household earning more than $15K in taxable income has saved over $300 per taxpayer each and every year since 2001 due to this "Bush Tax Cut".
2003: George Bush Admin: Rebates of $400 per child. This was also an "Advance Payment" based on the fact that the child tax credit increased from $600 to $1000 per child. Again, it had to be accounted for when the 2003 return was filed, and the same problems surfaced with financially challenged taxpayers, but this time around there was a way to check it on the internet - much less of a problem for preparers who knew how to handle it. It is also interesting to note that every taxpayer who has children has seen a tax reduction of $600 for each child for each and every year since 2003 and for every child born during that period, until the child reached age 17.
Looking at the history, it's clear that both of the "Rebates" under Bush administrations wer actually "Advance Payments" and had to be reconciled on the following year's tax return. This was not because it was taxable income, but because it was money advanced against a reduction in a future tax liability - almost the same thing as an Advance EIC.
One might conclude from this history that the current rebate may be handled the same since both previous payments under Bush had to be repaid and should be a cause for consternation (especially if they happen to dislike Bush). However, both of these "Advance Payments" were issued to get money into people's hands in the aftermath of a change in tax rates (or an increase in a credit). Given the circumstances, it was logical and financially proper to account for the "Advance Payments" on the following year's tax return.
Neither of these situations exist as things are being discussed right now. There is no tax reduction or credit increase on the books, so there's nothing to advance against. So I think that unless Congress decides that the Rebates must somehow be "Repaid" in the future, these rebates will be similar to the Ford rebates. You get the check, and that's the end of it.
Incidentally, I mentioned the possibility of some future Congressional action to recoup the rebates only because there is also precedent for that. Who remembers the "Tax Surcharge" that showed up on our returns back in the 1960's? You added up your tax liability, then tacked on an extra few percent as a mandatory "tip" to the tax system (more or less like what some restaurants do to your check when your party has 8 or more at the table). And of course, the next election may reward us with a new administration that will reverse all the Kennedy, Reagan, and Bush tax cuts, hiking tax rates so much that we will long for the good old days when the biggest problem was explaining the AMT to a few of our clients..
I did a little quick research on the history of "Rebates" to try and figure out how this one will play out. (Although past performance is no guarantee of future results) Here is what I came up with:
1975: Gerald Ford Admin: Rebates of $100 - $200 were sent to each household. There was no repayment, reporting, or other follow-up required.
2001: George Bush Admin: Rebates of $300 - $600 were sent out as an "Advance Payment" of the anticipated reduction of the lowest tax bracket. Reducing the tax bracket from 15% to 10% meant that every taxpayer saw a reduction of their total tax due by this amount so the government sent it out early as a "stimulus" (as well to buy political favor). It was a bit of a problem because it had to be taken into account on the 2001 return filed in 2002, but the fact is people did get the money. Some were just too financially challenged to understand the math, and it did cause some proiblems for preparers (although I don't recall it being a major issue). Interestingly, we should keep in mind that every household earning more than $15K in taxable income has saved over $300 per taxpayer each and every year since 2001 due to this "Bush Tax Cut".
2003: George Bush Admin: Rebates of $400 per child. This was also an "Advance Payment" based on the fact that the child tax credit increased from $600 to $1000 per child. Again, it had to be accounted for when the 2003 return was filed, and the same problems surfaced with financially challenged taxpayers, but this time around there was a way to check it on the internet - much less of a problem for preparers who knew how to handle it. It is also interesting to note that every taxpayer who has children has seen a tax reduction of $600 for each child for each and every year since 2003 and for every child born during that period, until the child reached age 17.
Looking at the history, it's clear that both of the "Rebates" under Bush administrations wer actually "Advance Payments" and had to be reconciled on the following year's tax return. This was not because it was taxable income, but because it was money advanced against a reduction in a future tax liability - almost the same thing as an Advance EIC.
One might conclude from this history that the current rebate may be handled the same since both previous payments under Bush had to be repaid and should be a cause for consternation (especially if they happen to dislike Bush). However, both of these "Advance Payments" were issued to get money into people's hands in the aftermath of a change in tax rates (or an increase in a credit). Given the circumstances, it was logical and financially proper to account for the "Advance Payments" on the following year's tax return.
Neither of these situations exist as things are being discussed right now. There is no tax reduction or credit increase on the books, so there's nothing to advance against. So I think that unless Congress decides that the Rebates must somehow be "Repaid" in the future, these rebates will be similar to the Ford rebates. You get the check, and that's the end of it.
Incidentally, I mentioned the possibility of some future Congressional action to recoup the rebates only because there is also precedent for that. Who remembers the "Tax Surcharge" that showed up on our returns back in the 1960's? You added up your tax liability, then tacked on an extra few percent as a mandatory "tip" to the tax system (more or less like what some restaurants do to your check when your party has 8 or more at the table). And of course, the next election may reward us with a new administration that will reverse all the Kennedy, Reagan, and Bush tax cuts, hiking tax rates so much that we will long for the good old days when the biggest problem was explaining the AMT to a few of our clients..
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