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Brooks Jackson: Understanding the tax 'rebates'

Brooks Jackson
Brooks Jackson  

Brooks Jackson is a CNN senior correspondent.

CNN: Good day Brooks Jackson. Thanks for joining us to talk about the tax "rebate."

BROOKS JACKSON: Hello. Happy to be here

CNN: Brooks, what is the most common misconception about these "rebates"?

JACKSON: They are called "rebates" -- by politicians and even many of us in the news media, but they really are not rebates or refunds of taxes paid for last year. The IRS calls them "advance payments" of a tax credit for 2001. That means you are getting right now an advance of a tax reduction that would have been received next April. So your refund next April will be reduced by the amount of the check you may be receiving now (or you will owe that much more) Clear?

Message Board: Taxing and spending  

CHAT PARTICIPANT: What I want to know is: If the IRS has to borrow $51 billion from the capital markets to pay for the rebates, what will THAT do to the economy?

JACKSON: Very little, actually. Here's the deal. The federal surplus had been estimated at $280 billion for this fiscal year, which ends Sept. 30. The 'advance payments' will amount to $38 billion, and will reduce the surplus by that much, since they were not originally budgeted. The borrowing by Treasury is a temporary cash-flow thing. The surplus will still be in the neighborhood of $160 billion to $200 billion, even with the tax payments, weaker corporate tax payments, and a big accounting gimmick that Congress passed to push some tax revenue off until Oct. 1, the start of NEXT fiscal year.

CHAT PARTICIPANT: Mr. Jackson: Isn't this advance like taking out a no-interest loan that has to be paid back next April?

JACKSON: That's one way of looking at it, but since there IS no interest, it's better from the consumer point of view to have it now than have it later.

 Tax rebate schedule
Date mailed Last 2 digits of Social Security #
July 20 00-09
July 27 10-19
August 3 20-29
August 10 30-39
August 17 40-49
August 24 50-59
August 31 60-69
September 7 70-79
September 14 80-89
September 21 90-99
 Source: Internal Revenue Service

CHAT PARTICIPANT: Why have no banks or mutual funds promoted investing tax rebates in IRAs?

JACKSON: Good question -- though in fact a spokesman from Fidelity appeared on CNN to make that case not long ago. Mostly we've seen retailers urging you to spend it. But for many it would make more financial sense to fund an IRA, or pay off credit card debt, or start a college fund.

CHAT PARTICIPANT: Do we have to claim it on this year's taxes?

JACKSON: The short answer is no. It is not taxable by the federal government, IRS says. However... It would have been subject to state income tax in nine states -- according to Tax Analysts, a good authority. But those nine states have passed special legislation to exempt these payments, this time.

CHAT PARTICIPANT: Why are we getting this "free" tax rebate?

JACKSON: Why indeed? A big reason of course is that it is popular, and Congress likes to do the popular thing. President Bush had not proposed a payment this year -- his tax cut would have taken effect later. However, the economic argument -- a good one -- is that the economy is so weak that it can use the boost. And this $38 billion will be flowing into consumers' pockets at precisely the moment it is needed.

CHAT PARTICIPANT: Brooks, how much money was actually spent in the processing of the pre-notification letters to everyone (those receiving a rebate and those not receiving a rebate) as well as actual refunds? It must be astronomical!

JACKSON: I don't know the exact number -- in the millions, surely -- but as a fraction of the $38 billion actually being sent out, it's peanuts.

CHAT PARTICIPANT: Brooks, are there still some states out there who will be taxing the "rebate" as part of income next year?

JACKSON: The answer I got just a few minutes ago from tax analysts -- and I checked because I thought this would come up -- is 'no.'

CHAT PARTICIPANT: Mr. Jackson, would there have been any advantage to taking any portion or all of the tax cut and instead applying it to pay down the debt?

JACKSON: The debt will still be paid down this year by a huge amount -- whatever the surplus turns out to be. The advantage to paying it down even more would have been lower interest payments required by the government in future years and a bit more economic growth, perhaps. But this is just a change at the margin. The fact is the debt continues to be paid down, and will be reduced for many years to come under current projections

CHAT PARTICIPANT: Who will not be receiving the rebate?

JACKSON: Some of the categories of people who will NOT get the 'advance payment' (remember, it's not a 'rebate') are: --Persons who did not have any taxable income last year --Persons who were declared as dependents on somebody else's tax return (including most college students) and, -- Persons who have not yet filed their taxes for last year By the way... If somebody did not have taxable income last year, but WILL have this year, they will still get the benefit of the payment -- but not until they file their returns next year.

CNN: Brooks, do you have any final thoughts for us today?

JACKSON: There's lots more information available on the IRS web site, and here are a couple of useful links: The first one is a press release giving frequently asked questions, and answers. The second is an entire Web page the IRS has devoted to explaining the background, how to calculate what you should receive, and so on.

CNN: Thanks for joining us today, Brooks Jackson.

JACKSON: My pleasure. Goodbye, all

Brooks Jackson joined chatroom from Washington, D.C. The above is an edited transcript of the interview on Friday, August 03, 2001.

• Internal Revenue Service
• Congressional Budget Office
• The White House

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