Don't Confuse Recovery Rebate Credit With Deduction

Posted: Feb 22, 2009 12:01 AM
Don't Confuse Recovery Rebate Credit With Deduction

Judging by your continuous e-mails and letters, taxpayers this year are more confused than ever.

I'll focus today on the two issues you've asked about the most: the so-called recovery rebate credit and the additional standard deduction for property taxes.

Tax laws are complex, and I can give only generalized information. Anybody with a specific issue or question should consult a qualified tax professional.

With that caveat, let's tackle this representative question, which illustrates two misconceptions:

Q: I'm confused. Are there two separate categories in the recovery rebate program? My wife and I are over 65 and did not itemize, and our property taxes were $5,000. So I think we are eligible for the $1,000 you wrote about. However, on the recovery rebate credit worksheet, it works out that we are to receive $1,200.

A: The first misconception is that you're lumping together two separate things -- the recovery rebate credit and the standard deduction for property taxes. Let's take them one at a time.

-- The recovery rebate credit amounts to a second chance for taxpayers who did not qualify for the economic stimulus payment from the government in 2008, or at least not all of it.

Last year, most Americans received checks from the government based on their income, number of dependent children and other factors reported on their tax returns for 2007. The maximum amount was $600 per person ($1,200 for joint filers) plus $300 for every qualifying child.

Those who received the maximum amount last year, as I did, cannot claim the recovery rebate credit now.

But taxpayers with adjusted gross incomes above a certain limit ($75,000 for singles and $150,000 for married couples) received smaller payments or none at all last year. These taxpayers can now claim a credit for the amount they missed receiving provided they qualify now based on their income and other factors for 2008.

"So if your situation changed in 2008, you can still qualify if you didn't get a check in 2008, or if you got a check for less than the maximum amount," said Harris Abrams, senior tax analyst for the Tax and Accounting business of Thomson Reuters. You may qualify, for instance, if you got laid off and made less money in 2008, or if you had or adopted a child.

Any credit this year would be used to reduce the tax you would otherwise owe on your 2008 return, or increase your refund.

The credit is "refundable," meaning you can get it even if you owe no tax or owe less tax than the credit amount. (For example, if your overall tax liability for 2008 year is only $100 and you qualify for a $1,200 credit, you would get a $1,100 refund.)

-- The additional standard deduction for property taxes, up to $500 for singles and $1,000 for married couples but no more than property taxes actually paid, is a separate tax break Congress approved for the 2008 and 2009 tax years.

The intent is to help homeowners whose property taxes and other itemized deductions are not enough to exceed the standard deduction. Contrary to another misconception, there are no age requirements to qualify (so you don't have to be over 65).

Many of you -- including three accountants -- were confused because there is no separate line on the tax forms to report this additional standard deduction. You just add it to the total on line 40 of Form 1040. A 10-item worksheet on page 35 of the 1040 Form instruction booklet should guide you through the process.