Personal Tax Rebates

Providing the economy with what he calls a “booster shot,” President Bush signed the income tax rebate into law last week. The $168 billion stimulus package of personal tax rebates and business tax cuts could bolster consumer spending later this year, economists say, and minimize the pain of a possible recession.

Your 2007 tax return will determine your eligibility and your rebate amount. In most cases, individuals will receive a maximum of $600, $1,200 for taxpayers who file a joint return. Expected minimums? $300 for individuals and $600 for taxpayers filing jointly. Parents also will receive an additional $300 for each qualifying child.

Eligibility for the stimulus payment is subject to income limits. The payments will be reduced for individuals earning $75,000 or more and for married couples earning $150,000 and up.

You’re likely to receive two notices from the IRS. The first will explain the stimulus payment program. The second notice will confirm your eligibility, the payment amount, and the approximate time table for your payment. Save this notice for your 2008 tax return.

Although surveys show many consumers say they’ll save the tax-rebate money, Mark Zandi, chief economist for Moody’s Economy.com, notes in a recent article on MarketWatch that it’s likely that most of rebates will be spent. He bases his opinion on a recent study that showed Americans spent the bulk of their tax rebates in 2001 and 2003.

Also in the MarketWatch article, “Tax Rebates Really Will Boost Economy, for a While,” economist Mike Englund of Action Economics says the rebate, which amounts to a one-time 18% increase in monthly pay, may translate into a “second holiday shopping season” later this summer, even if Americans spend only half of what they receive.

However, in a January 31st press release, Mark Johannessen, CFP®, president of the Financial Planning Association® (FPA®), says its “ironic that Washington is telling Americans to go out and spend to help save our troubled economy.” Labeling the package “anti-savings and anti debt-reduction,” he says it might help the economy, but it won’t help Americans dig out of their debt.

He notes, “The problem is that the average American household credit card debt is $8,400, the national savings rate is minus 1/2 percent and bankruptcies are on the increase. So, spending the rebate may not be in the best interest of many Americans. Not setting up a household budget is how many Americans got into financial trouble in the first place.”

That’s something to think about before you hit the mall.