Now that the dust has finally settled on the announcement that the government wants to spray tax rebates at consumers to get the economy humming again, the mailbox this week was full of variations on the same question: How much will I get? Like anything involving taxes and the government, the answer isn’t as simple as it should be.
Before I get too excited about this "tax rebate," I want to know, is this an advance on next year's tax refund? Will this make me get less back on my 2008 refund, or even have to pay? Or is this a gift from my government that I can spend freely?
— Bill A., Corpus Christi, Tex.
The deal goes something like this: just about anyone who earned a paycheck in 2007 gets at least $300 back from the IRS; many will get rebates of $600 each, or $1,200 per couple. If you have children who qualify as dependents, you get another $300 for each child. If you earned at least $3,000 last year, but not enough to pay income taxes, you still get $300.
So far, so good. The rebates “phase out” for people who earned $75,000 or more and filed an individual return; the limit is $150,000 for couples who filed jointly. The phase-out clips your check by five percent of any amount over those limits. So if you’re single and earned $80,000, you’ll get: $600, minus five percent of the $5,000 you earned over the $75,000 limit ($250), which leaves you with $350. That effectively caps eligibility at $87,000 in income for singles and $174,000 for couples.
If you earned more than those limits in 2007, you get nothing. Unless you have kids, in which case you get $300 per kid. But you could lose that too if you earned enough to burn off your child credit with the 5 percent phase-out. That would happen to a married couple with one child that earned $180,000 last year; the first $24,000 over the limit would burn up their individual credits and the next $6,000 would eliminate the $300 child credit. (Still with us on this?)
Rebates for married couples are based on a joint return. So if you and your spouse together earned $95,000 and paid more than $1,200 in taxes, you’ll get a check for $1,200 for “individual” credits — even if one spouse earned a lot less than the other. If you and your spouse only paid $750 in taxes (less than the $1,200 rebate limit), you only get back $750.
Retirees are also eligible — as long as they paid taxes. So if your income came from other sources, like pensions or Social Security, you’ll get a rebate based on how much you earned and how much you paid in taxes. (If you’re living exclusively off tax-free municipal bonds, on the other hand, and you didn’t pay taxes, you don’t get a check.) For more handy examples, check out the Treasury Department’s Web site.
Keep in mind this rebate has nothing to do with the refund you may be owed from having too much withholding taken from your paycheck. The rebates won’t effect that refund. If you owe taxes, you can just give your rebate back to the government and they’ll use it to pay your bill.
The Treasury figures that something like 117 million families are in line for $103 billion worth of checks — but only if the Senate goes along with the plan worked out by the White House and the House. It’s hard to see how any Senator in an election year would block the plan.
But hey, it’s the Senate. So until you see a picture of President Bush signing the law, don’t spend the money just yet.
What about IRA's? I am 68 and my statements scare the doodles out of me. Our accountant says "NO" to cashing them in and paying off all debt because of tax penalties. But which is worse: seeing the falling balances or paying a tax penalty?
— Betty K., Colorado Springs. Colo.
The important question is: where are your IRA savings invested? If they’re in risky stocks, you may want to move them into something less risky like bonds that allow you to hang on to more of your doodles.
The problem is trying to decide whether to do that now — after the market has taken a big bite out of those stocks — or wait for your stocks to recover. And the answer to that is beyond the scope of this column. (We traded in our stock market crystal ball awhile back because it got stuck on “Up, Up and Away!!” after the Internet bubble.) As anyone learned who sold off after the market’s big plunge last tuesday, markets that drop sharply can just as suddenly go back up. In roughly 25 years of following the markets, though, we’ve yet to find anyone who can reliably pick market tops and bottoms. (If you do come across one, please let us know.)
There’s a case to be made that the sell-off may soon have run its course. But it’s also entirely possible that we face a prolonged downturn that won’t hit bottom until later this year or even next. The only honest answer is: no one knows.
Still, markets like this one offer a terrific reminder of how much risk you can tolerate. If your current holdings are too volatile for your comfort level, by all means think about shifting them to something calmer over the long haul.
On our yearly stock report there shows a loss of $700. Can we claim the loss on our income taxes? If so, what forms might we need?
— Sandra, Address withheld
A “loss” for tax purposes is not necessarily the same as what you or I might think of as an investment loss.
The taxable gain on an investment begins when you buy it, not when the year begins or when your stocks are up from one month to the next. You also don’t officially “lose” money until you sell the investment — even if your statement shows the value of your holdings have dropped since your last statement.
Tax gains are calculated using the purchase price (sometimes called the “basis”) and the sale price, which represents your proceeds. When you calculate your gains, you also get to deduct direct costs like trading fees and commissions from the sale price.
So if you bought stock or mutual fund shares for $500 five years ago, sold them for $1000 last week and paid brokerage fees of $25, your “gain” for tax purposes would be $1000 (the sale price), minus $500 (the purchase price, or “basis”), minus $25 in fees, which leaves you with a $475 capital gain.
If your $500 worth of stock rose to $1000 and then fell to $750, you would understandably feel like you’d “lost” $250. But the IRS doesn’t see it that way. Because you paid $500 for the shares, with the stock at $750, the tax man figures you’re still $250 ahead. So if you sold the investment, you’d owe tax on that $250 capital gain (minus your costs).
That means the only way to book a tax loss on an investment is to sell it for less than you put into it.
The form you use is called a 1040 Schedule D, on which you list all of your gains and losses for the year, and then subtract your losses from your gains to find out your total capital gains for the year. The one wrinkle is that you have to separate short-term gains and losses (investments you held for less than a year) from your long-term gains (hose held more than a year.) That's because short term gains are taxed at a higher rate than long term gains.