Accounting For The Tax Rebate

Many taxpayers are wondering what they should do to account for last year's rebate checks on their 2001 tax returns. The answer: Basically nothing.

These rebates were advance payments on the new 10 percent tax rate implemented for 2001. Taxpayers who received refunds of as much as $300 for singles, $500 for heads of households and $600 for married couples filing jointly simply should leave blank the rate reduction credit line on their IRS forms 1040, 1040A or 1040 EZ. Even those who've been laid off don't have to do anything special -- no need to pay back the rebate or deduct it anywhere.

The only people who should use the rate reduction credit line on Form 1040 are those who didn't receive the maximum rebate amount they were owed or didn't get a check at all because of address or mail problems. For example, a person who received a $300 credit based on his 2000 status as a single taxpayer, but who now has a dependent and qualifies as a head of household, should use the rate reduction credit line to reconcile the difference in what he's due -- in this case, $200.

It's only if you actually got less than the maximum allowed for your filing status for 2001 that you really need to take a look at it. If by chance you actually should get more than what you already got, that's your rate reduction credit.

Taxpayers who fill in that line when they don't have anything additional they're owed likely will find their returns kicked out as errors, resulting in a delay receiving their refunds or a letter from the IRS.

The rebate checks also won't have an impact on state income tax forms. States don’t consider the rebate in computing your state tax liability and won't make you take it into account.

Here are a couple of other items. Dependents weren't eligible for tax rebates last year but there's a worksheet on line 40 of IRS Form 1040 to determine how they can take advantage of the lower tax rate this year.

People whose taxable incomes declined from 2000 levels don't have to worry about paying back rebate checks that anticipated their having higher income for 2001. Some people may wind up getting an extra 300 bucks they wouldn't have been entitled to if Congress had done a straight tax cut. If they overpaid you, you get to keep the money.

Be sure to correctly report the rebate you received (or didn’t receive). If you have questions about this or any other tax or financial topic, please call or email.