Everything you could possibly want to know about the Economic Stimulus Act of 2008. Well, probably not everything...but enough to keep you busy reading for a few minutes, at least. :-)

On February 7, 2008, the House and the Senate agreed on a version of the economic stimulus bill, and the President has said he will sign it next week. The bill is H.R.5140, the Economic Stimulus Act of 2008.

The bill establishes "recovery rebates" for individuals, to be sent to people in advance via check. These so-called rebates are established as refundable tax credits. (A refundable tax credit is a credit that can result in you receiving money from the government that you never paid them. The Earned Income Credit is a refundable credit. A non-refundable tax credit can only reduce your tax liability to zero; in other words, it only affects money that you already paid/owe the government. The Child Tax Credit is a non-refundable credit.)

Eligible individuals receive a basic credit that is the greater of the following 2 amounts:
-Their net income tax liability for 2008, up to $600.
-$300, if the individual has at least $3,000 in earned income.
(amounts are doubled for joint returns)

If your adjusted gross income (AGI) is greater than $75,000 (double for joint filers), then the amount of your credit will be reduced by 5% of the amount of your income over the limit. So if you're a single filer making $80,000 your basic credit will be reduced by $250 (($80,000 - $75,000) * 0.05 = 250).

Individuals who are eligible for any amount of the basic credit are also eligible for the qualifying child credit. This is a $300 credit for each qualifying child. The definition of a qualifying child is the same as for the child tax credit. (Again, this is based on 2007 tax returns.)


The rebates are structured around a tax cut. Yes, a tax cut. This isn't stated anywhere in the actual text of bill, but it is stated in the following locations:
-A Fact Sheet from the White House

In 2008, taxes would be cut from 10 percent to zero percent on the first $6,000 dollars of taxable income for individual taxpayers and the first $12,000 of taxable income for couples.

-The Congressional Record for the House of Representatives, January 29, 2008

Quote from the Honorable Spencer Bachus

The tax element of this package has been called a rebate, but in essence, it's a tax cut, a tax cut for millions of low- and middle-income Americans, those who need it the most, those with a moderate income. link

Words from the Honorable Rahm Emanuel

I enthusiastically support the middle class of this country, and we are doing it in this bill. Thirty-seven million Americans who were left out of the 2001 and 2003 tax cut will get close to $28 billion of this tax cut. I enthusiastically support that type of economic prosperity. link

Words from the Honorable Ron Paul

Another disturbing feature of H.R. 5140 is that, instead of taking the fiscally responsible course and pairing the tax cuts with spending cuts, this bill simply adds to the national deficit. Madam Speaker, unless Congress acts soon to reign in its excessive spending the American people will face confiscatory tax rates or skyrocketing inflation. link

If I'm understanding all of this correctly, then here is what is happening:
-The government cuts a specific section of taxes for the current tax year.
-This means that many people will have a smaller tax liability when they file taxes next year (for the 2007 tax year).
-If you know that people are going to owe less money in taxes, what is the logical solution? Decrease the amount of money that you withhold from their paychecks, right? Wrong. Send them the extra money that they will be receiving in their tax refund next year. But wait! They haven't actually paid this money yet. Oh...hmm...well, we'll just keep taking the same amount out of their paychecks, and it'll all add up by the end of the year.

The checks are an advance on next year's refunds, and most, if not all of the money, will be deducted from taxpayers' refunds in 12 months' time. CNN article

If the amount of your rebate is greater than the decrease in your tax liability because of the temporary tax cut, you won't be required to repay that rebate.

The Joint Committee on Taxation

Taxpayers will reconcile the amount of the credit with the payment they receive in the following manner. They would complete a worksheet calculating the amount of the credit based on their 2008 tax return. They would then subtract from the credit the amount of the payment they received. For many taxpayers, these two amounts would be the same. 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. link

These advance payments will be based on 2007 tax returns, and will start being sent out in May. If you file your return late, or file an extension, you'll probably receive your payment later than most people.

MarketWatch article

The rebates would be based on taxpayers' 2007 tax returns. Those who file extensions or file late would likely receive their checks later than regular filers, a U.S. Treasury spokesman said last week. The checks will be sent out automatically; taxpayers don't need to apply. link

Regarding the question of whether this is "free money", I guess that depends on the specifics of your individual situation. If your net tax liability for this year is less than the amount of the rebate that you receive, then I guess the difference between the two amounts would be free money, because you'll have received money that was never yours to begin with. But if your net tax liability is more than your rebate, then your rebate isn't free money - it's just an advance refund of money you'll be sending to the government for the rest of the year.

(To the best of my knowledge, all of the above information is correct. However, it's always possible that I'm misinterpreting something somewhere, so believe everything at your own risk!)

Update: I originally typed and posted this before the IRS had a decent Q&A page about these stimulus payments. They have since posted a FAQ page, and I would encourage you to check it out as well.

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