February 27, 2008 - As many people use our Tax Center to prevent mistakes with their tax returns, we want to alert you to an important tax development. The Economic Stimulus Act of 2008, signed into law on February 13, 2008, may result in a tax rebate for you, depending on your 2007 tax return. Stock compensation can affect this tax rebate.

Basics Of The 2008 Tax Rebate

The IRS expects to start sending out rebate checks in May. The basic rebates, which are not taxable, are:

  • between $300 and $600 for individuals with at least $3,000 in earned income, including Social Security benefits, and/or veterans' disability benefits
  • between $600 and $1,200 for joint filers with at least $6,000 in earned income
  • an additional $300 per qualifying child (analogous to the definition of the child tax credit), without a limit on the number of children

"Earned income" includes income from stock compensation that is reported on your W-2 (e.g., income from the exercise of nonqualified stock options or from the vesting of restricted stock or restricted stock units).

Phaseouts: How Much Are You Eligible For?

The rebate is phased out at a rate of 5% of the amount by which your adjusted gross income (AGI, line 37 on your 2007 Form 1040) exceeds the thresholds of $75,000 for single filers and $150,000 for joint filers. Therefore, if you're single with no children, your $600 rebate is eliminated at $87,000 of AGI, and for joint filers with no kids the $1,200 rebate disappears at $174,000 of AGI. The point for complete phaseout would be higher if you had children.

Example: You are married, file jointly, and have two qualifying children. You are eligible for a rebate of $1,800 ($1,200 plus two $300 child rebates). However, if your AGI is $186,000, the rebate is completely phased out, as you are $36,000 over the $150,000 threshold (5% x $36,000 = $1,800).

Tax Rebate Based On 2007 Income

Your tax rebate is measured only by the AGI on your 2007 tax return: the IRS does not care if your income in years before 2007 was lower or if in 2008 your income will be lower. The tax rebate would be additional to any refund you may be entitled to with your 2007 tax return. You cannot use the rebate to offset any federal taxes you owe for 2007 or apply it to any 2008 estimated tax payments.

Obviously, you must file your tax return for 2007 to obtain the rebate. (Some individuals or married joint filers may be eligible for the tax rebate in 2008 while not needing to file a tax return for 2007. Notice 2008-28 explains that these people may file a Form 1040A to request the rebate.) Extensions of your filing deadline beyond the regular due date of April 15 will delay your rebate check.

The rebate cannot exceed your net federal income tax liability (i.e., your regular tax plus any alternative minimum tax, reduced by certain credits). Any rebate that is based on a joint return is considered paid half to each spouse. So in the example above, if the taxpayers filed as single or head of household for the 2008 tax year, each taxpayer's credit would be $900.

Income Spikes From Stock Compensation Can Affect Your Rebate

Any stock compensation from NQSOs, stock appreciation rights, or restricted stock/RSUs that raised your reported AGI in 2007 counts towards the rebate's income thresholds and the phaseout, even if this extra income was isolated and not typical of your normal AGI. If you exercised incentive stock options (ISOs) and held the stock through the end of 2007, the ISOs are not part of your AGI and therefore would not affect the rebate (this spread is part of your AMT calculation). Similarly, the discount on shares bought in a tax-qualified ESPP that are held through the end of the year are not included in AGI.

Second Chance In 2009

If stock compensation in 2007 reduced your rebate, you may get a second chance when you file your 2008 tax return in early 2009: the rebate is technically considered an advance against your 2008 tax liability. If you get a rebate that is lower than it would have been if it had been measured by your AGI in 2008 (or if you had a child in 2008), you can get a refundable credit for the difference on your tax return for 2008. (However, the IRS still needs to issue guidance on this.) Fortunately, if your AGI in 2008 turns out to be higher than the 2007 AGI used to calculate the rebate you receive this year, you do not need to refund any of the rebate with your 2008 tax return.

More Information

The IRS has published basic information about the rebates on its website. For more details on tax return topics related to your stock compensation, including annotated samples of Schedule D and Form W-2, see the Tax Center at myStockOptions.com.