Lawmakers are currently debating the size and structure of “recovery rebates” for individual taxpayers as part of a package addressing the current health and economic crisis. The exact mechanism and timing of these potential rebates, designed to provide a one-time income boost for individuals to weather the economic crisis, is at this point unknown. How the government issued taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rebates in the past can be a window into what mechanisms policymakers might consider during the current crisis.
Senate Republicans have proposed a $1,200 refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for individuals ($2,400 for joint taxpayers) which begins phasing out at a 5 percent rate at $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers. Additionally, taxpayers with children would receive a flat $500 for each child. We estimate the rebate would decrease federal revenue by about $301 billion in 2020, according to the Tax Foundation General Equilibrium Model. House Democrats are working on their own version of a rebate, which may have a different structure than the proposal by Senate Republicans.
The details of the credit could change as the Senate works to reach a final version of its bill, which will need to be agreed upon by House lawmakers before it can be signed into law by the President. The method for sending out any potential rebates would likely be determined by the U.S. Treasury Department.
The Economic Growth and Tax Relief Reconciliation Act of 2001 was signed into law on June 7, 2001 and lowered taxes for Americans during the 2001 recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . In all, Treasury calculated that 92 million taxpayers would receive a check, amounting to a total of approximately $38 billion worth of rebates.
Single taxpayers were entitled to a credit of up to $300 and married taxpayers filing jointly a credit of up to $600, delivering the law’s lowering of the 15 percent tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. to 10 percent directly to taxpayers in the form of a check from the Treasury Department. The credit amount was calculated as the 5 percentage-point difference in the new brackets, multiplied by the basis of the taxpayers’ taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. from the previous year.
Beginning in mid-July 2001, the Treasury Department sent notices in the mail to inform taxpayers about their rebates. Next, the checks were sent out in the mail over a 10-week period from July 23 through September 24; the exact timing of receiving a check varied with the taxpayer’s Social Security number.
The Economic Stimulus Act of 2008 was signed into law on February 13, 2008 and delivered about $120 billion of economic stimulus payments to more than 124 million households. The law eliminated income taxes on the first $6,000 of taxable income for individuals and the first $12,000 of taxable income for married couples filing jointly. This reduction in taxes was delivered to taxpayers in the form of a stimulus rebate check; individuals received up to $600 and couples filing jointly up to $1,200 (corresponding to taxable income subjected to the 10 percent tax bracket). Taxpayers with children eligible for the Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CTC) received an additional benefit of $300 per dependent child. This tax rebate phased out for higher income filers at a rate of 5 percent of adjusted gross income over $75,000 single/$150,000 married couples. To be eligible, taxpayers had to earn at least $3,000 of qualifying income and meet other requirements.
The Treasury Department sent payments via direct deposit primarily in the first half of May 2008. For taxpayers without direct deposit information on their 2007 tax returns, stimulus rebate checks were sent via mail from mid-May to mid-July. As with the 2001 checks, the exact timing of receiving a check varied with the taxpayer’s Social Security number.
The American Recovery and Investment Act of 2009 was signed into law on February 17, 2009 and provided approximately $14.2 billion of “Economic Recovery Payments” to approximately 52 million beneficiaries of federal programs (i.e., Social Security and Supplemental Social Security Income, Railroad Retirement Board, and Department of Veterans Affairs). These beneficiaries received a one-time payment of $250, which was issued separate from other payments, but sent by using the same method for how recipients received their regular benefits (for example, by check, direct deposit, or debit card). Notices of the payments were sent in April 2009, and payments were issued in May 2009.
While taxpayers also received relief in the form of Making Work Pay tax credits, these were not sent in the form of rebate checks but rather through lower paycheck withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. s. This provided a 6.2 percent tax credit on earnings for a maximum credit of $800 for joint filers ($400 for single filers) in 2009 and 2010. The credit began to phase out at $150,000 ($75,000 filing single) and phased out completely at $190,000 in income ($95,000 filing single).
Past experiences with rebates show that the government has used both direct deposit and paper checks to send tax rebates to individual taxpayers, depending on which method taxpayers had selected as their refund choice on their tax returns. To qualify for the 2001 and 2008 rebates, individuals had to have filed a tax return, and those who did not normally need to file tax returns could qualify if they filed in time and had enough qualifying income.
The timing from enactment to distribution has varied from about one and a half months to more than two months, indicating that it has historically taken a significant amount of time for individual taxpayers to receive their rebates after the policies have been put in place.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe