Preventing a Child Death Tax

January 30, 2008

The stimulus package just passed by the House and now under consideration by the Senate, is designed as a 2008 tax cut, with part of the refund you would normally get in spring 2009 advanced to be mailed out this spring ($600 under the House, maybe $500 in the Senate plan). But the House version sets income caps, and since that income hasn’t been earned yet, the IRS is left having to use 2007 numbers instead. So if you earn less than the cap in 2007, you’ll get the rebate even if you bust it in 2008.

It’s not easy to follow. After all, the federal income tax code is already a huge, burdensome, complex mess, with its W-2s, instruction booklets, calculations, brackets, AMT, and phaseouts of phaseouts. Taxpayers struggling with this mess often take out their ire, rightly or wrongly, on the tax collector.

It’s hard to have sympathy with the tax collector, but we almost did when we realized a glitch about the $300 child tax credit in the stimulus plan. Like the income caps, the IRS will rely on your 2007 return to determine if you have a “qualifying child.” (“Qualifying child” is a term of art, but for the child tax credit, basically it’s someone you support who’s under the age of 17, and who lived with you at least half the year.) But the credit is part of your 2008 taxes, so if it turns out you’re not eligible when you file in 2009, you’d have to give the money back. We fretted that families grieving over the loss of their child in 2007 would get a $300 check this spring, only to have the IRS demand that they return it in 2009.

Luckily, that’s not the case:

If, however, the result is a positive number (because, for example, the taxpayer paid no tax in 2007 but is paying tax in 2008), the taxpayer may claim that amount as a credit against 2008 tax liability. If, however, the result is negative (because, for example, the taxpayer paid tax in 2007 but owes no tax for 2008), the taxpayer is not required to repay that amount to the Treasury. Otherwise, the checks have no effect on tax returns filed in 2009; the amount is not includible in gross income and it does not otherwise reduce the amount of withholding.

So any rebate you get this spring you get to keep, even if it turns out on your 2008 form that you weren’t eligible for it, so long as you were eligible in 2007.

And they wonder why we think the tax code is too complex.

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