What is the Recovery Rebate Credit?

So it's that time of year again: tax filing season. With the constant changes to tax laws and credits, taxpayers are often left confused as to what new laws and tax credits apply to them. The hot topic this year? The Recovery Rebate Credit.

So, what exactly is the Recovery Rebate Credit? Remember last summer when the government issued those mysterious Stimulus Rebate checks in the mail? Taxpayers who qualified for the advance stimulus rebate check received anywhere from $300 to $600 per taxpayer and an additional $300 for each qualifying child included on the tax return. These amounts were figured based on information included on 2007 tax returns filed with the IRS. The big question on everyone's mind last year was, "Is my stimulus check going to be taxed on my 2008 return?"

Now the time has arrived to file our 2008 tax returns and a new line has been included on the 1040EZ, 1040A, and standard 1040: Recovery Rebate Credit. For those "do-it-yourself" types chances are you are somewhat uncertain what belongs here. Here's a tip: the stimulus check that you received last year is NOT included ANYWHERE on your tax return! If you received the MAXIMUM $600 per taxpayer and $300 per qualifying child then you don't need to worry about the recovery rebate credit at all.

The recovery rebate credit is only for those taxpayers who either did not qualify for a stimulus check last year but do qualify now, or for those who were not entitled to the maximum amount but do qualify for the maximum based on information contained on their 2008 return. The recovery rebate credit is essentially a "second chance" to obtain a tax-free stimulus from the government.

For example, if you are a married couple filing a joint return who had two children included on their 2007 tax return and had a tax liability of more than $1200 after credits, they would have received the maximum stimulus check allowed to them of $1800 ($600 per taxpayer and $300 per child). This couple would not qualify for a recovery rebate credit on their 2008 return and would therefore leave that line blank on the tax return.

On the other hand, let's take the same couple from the previous example and say that they had a baby in 2008, so now they have three qualifying children. Now they can claim an additional $300 recovery rebate credit for the child they are claiming on their 2008 return that they did not claim on their 2007 return. An additional dependent on the return will be the most common reason to claim the recovery rebate credit.

Another reason to claim the recovery rebate credit will be having a higher tax liability after credits than the previous year. For example, our couple from the first example had only a $947 tax liability after credits in 2007, so they only qualified for a $947 stimulus check. In 2008 their taxable income increased and now they have a tax liability of $1265 after credits. They now qualify for an additional $253 recovery rebate credit (the maximum $1200 minus the $947 previously received).

Knowing that the IRS will allow an additional recovery rebate credit for those who missed out on the full amount last year brings up the question, "What if I received MORE money last year than I would have base on my 2008 return?" In this case, do nothing--the stimulus check is not taxable and the IRS is not going to require anyone to pay back an "overpayment."

It is important to note that tax returns containing an incorrect recovery rebate credit will be delayed by the IRS. If you cannot remember the amount of your stimulus check received in 2008 or whether or not you received one, you may check online at the IRS website http://www.irs.gov under "Avoid Recovery Rebate Credit Confusion" on their homepage.