“Tax Rebate” for 2001: Frequently Asked Questions About The Rate Reduction Tax Credit

“Tax Rebate” for 2001: Frequently Asked Questions About The Rate Reduction Tax Credit

Order Code RS20926
Updated June 20, 2001
CRS Report for Congress
Received through the CRS Web
“Tax Rebate” for 2001:
Frequently Asked Questions About
The Rate Reduction Tax Credit
Louis Alan Talley
Specialist in Taxation
Government and Finance Division
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16,
includes changes in individual income tax rates. Under the legislation, a new 10% rate
bracket is established that is retroactive to January 1, 2001. Technically, the benefit of
the reduced rate for 2001 is delivered in the form of a tax credit equal to 5% of the
taxpayer’s 2001 taxable income, up to the top of the new 10% tax bracket range for
taxable income. The range applies from the first dollar of taxable income to $6,000 for
single individuals, $10,000 for heads-of-households, and $12,000 for married couples
who file joint income tax returns. This means that those taxpayers who have taxable
income equal to or exceeding the 10% bracket will receive a maximum credit of $300 in
the case of single individuals, $500 for heads-of-households, and $600 for married
taxpayers filing jointly. The legislation directs the Treasury Department to mail checks
to taxpayers in anticipation of the 2001 tax reduction delivered by the “rate reduction tax
credit.” The rate reduction credit check to be sent taxpayers is frequently referred to in
the popular press as a “tax rebate.” The Treasury Department will calculate the amount
of the checks based on information reported on tax returns for the 2000 tax year. When
taxpayers file their 2001 tax returns, they will reconcile the credit to which they are
entitled with the check they received from the Treasury. If the credit is larger than the
advance payment the taxpayer can reduce their tax liability for 2001 by the difference.
This report is designed to help answer constituent questions on the amount of the check
to be sent to them and will be updated as additional information becomes available.
How much will I receive?
The amount of your check depends upon your filing status, non-refundable credits, and the
taxable income you reported for the 2000 tax year. The maximum rate reduction tax
credit amount is $300 for single individuals (5% of $6,000), $500 for those who file as
heads-of-households (5% of $10,000), and $600 for married couples filing jointly (5% of
$12,000). For those taxpayers whose taxable income (after non-refundable tax credits)
Congressional Research Service ˜ The Library of Congress

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fell below the top of the 10% bracket, the check will be equal to 5% of their taxable income.
Taxable income is the narrowest measure of income used on the income tax return. It is
equal to adjusted gross income1 (AGI) reduced by personal exemptions and either the
standard deduction or itemized deductions. As an example, a married couple with
$20,000 in adjusted gross income for tax year 2000 would have taxable income of $7,050
(AGI reduced by two personal exemptions of $2,800 each and the standard deduction
amount of $7,350). Thus, their check will be equal to 5% of $7,050 or $352.50.
A married couple filing jointly with the same income level but with a child would have a
2000 tax liability that is substantially smaller than the previous example. This is because
they would include an additional personal exemption for the child and are eligible for the
$500 child tax credit. Since their tax liability is lower they will receive a smaller check of
$31.88 (AGI less three personal exemptions of $2,800 each, less the standard deduction
of $7,350 which would lower their taxable income to $4,250). This taxable income is
subject to a 15% tax rate. Thus, they have a gross tax liability of $637.50. Their tax
liability is further reduced by the $500 child credit to $137.50. Their tax year 2000
taxable income of $137.50 will be multiplied by 5% to determine the amount of the rate
reduction check to be sent.2
Non-refundable credits3 such as the dependent care tax credit, the adoption tax credit,
foreign tax credit, etc., could reduce the amount of the check.
The IRS is sending taxpayers a letter which will provide the amount of the check to be
sent, the week that the check is to be processed, and the possibility of an offset for
outstanding debts such as child support. The letter will contain a chart allowing taxpayers
to verify the amount of the check according to his or her filing status. Those taxpayers
ineligible for the advance payment will receive an explanation of why they are ineligible.
These letters will be sent out by mid-July
Can you tell me an easy way to figure out the likely amount of my check?
If you look at the income tax return you filed for this tax year 2000 you can determine the
amount of your taxable income after nonrefundable credits. For those who filed form
1040, the amount of your check will be the lesser of line 39 multiplied by 5%, line 51, or
your maximum advance payment amount. Those who filed the 1040A form will find their
check will be the lesser of line 25 multiplied by 5%, line 33, or your maximum advance
payment amount. For those taxpayers who used form 1040EZ, their check amount will
1 For an explanation of commonly used terms in computing an individual’s income tax, see: U.S.
Library of Congress. Congressional Research Service. Federal Individual Income Tax Terms:
An Explanation. Report RL30110 by Louis Alan Talley.
2 Other examples can be found on the Internal Revenue Services website. The IRS web address
for these examples is http://www.irs.gov/ind_info/apinfo/index.html.
3 Tax credits can be either refundable or non-refundable. Refundable credits are those which can
exceed tax liability, resulting in a direct payment from the Treasury. Non-refundable credits can
only be used to the extent they eliminate tax liability.

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be the lesser of line 6 multiplied by 5%, line 10, or your maximum advance payment
amount. Remember that the maximum advance payment amount is determined by your
filing status ($300 for singles, $500 for heads-of-households, and $600 for married
couples filing jointly.)
The Internal Revenue Service (IRS) is responsible for computing the credit amount and
authorizing the Treasury Department to send the check.
Will all taxpayers receive a check?
Individuals and couples who filed and owed income taxes after non-refundable credits for
tax year 2000 (due April 16, 2001) should receive a check.4 Estates, trusts, nonresident
aliens, and those claimed as a dependent will not receive a check.
To what address will my check be mailed?
Generally, the IRS will mail the check to the address shown on the taxpayer’s 2000
income tax return. The IRS address files are updated weekly with the use of the U.S.
Postal Service’s national change-of-address database. Thus, those taxpayers who have
moved since filing their tax returns should make certain that the U.S. Postal Service has
their forwarding address. Taxpayers may notify the IRS directly about a change of
address by filing form 8822. This form is available on the IRS web site, www.irs.gov. If
you do not have a computer, you may obtain the form from your local IRS office or by
call 1-800-829-3676. Those taxpayers who had refunds deposited directly into bank
accounts should still expect to receive a check by mail. While the possibility of using
electronic means to deliver the funds was explored, it was determined to be impossible to
use electronic transfers because of data limitations and the fact that taxpayers may have
closed such accounts since filing their tax returns. Taxpayers may not request direct
deposit for the advance payment.
When will my check arrive?
The Internal Revenue Service will use the taxpayer’s tax year 2000 return to determine
eligibility for sending a check. Thus, those taxpayers who have filed for an extension of
time to file their tax return will not receive their check until after they have filed their 2000
tax returns. Those taxpayers may receive their advance payment up until late December.
The checks are to be issued according to the last two digits of the taxpayer’s identification
number, from lowest to highest (00-09, 10-19, 20-29, etc.). A taxpayer’s identification
number is generally his or her Social Security number. In the case of married taxpayers
who filed a joint return the mailing date is determined by the first Social Security number
that appears on the return. It has been reported that the initial batch of checks will be
issued the week of July 23, with a majority of taxpayers receiving their checks in
September. Currently, the IRS expects to send out the checks as provided in the table
4 The earned income tax credit is a refundable credit and not a factor in determining the advance
payment to be sent to taxpayers.

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below. Taxpayers who have failed to receive their check by October 5 may call the IRS’s
toll-free telephone number (800-829-1040) to check on the status of their advance
payment. No interest is to be paid to those taxpayers who receive their checks later. The
Treasury Department is precluded from sending any checks after December 31, 2001.
Table 1. Projected Schedule for Sending Advance Payments
Last two digits of Social
Refund to be Received the Week of:
Security Number
00-99
July 23
10-19
July 30
20-29
August 6
30-39
August 13
40-49
August 20
50-59
August 27
60-69
September 3
70-79
September 10
80-89
September 17
90-99
September 24
What happens if I fail to receive a check but have taxable income in 2001?
A worksheet will be provided to taxpayers when they file their 2001 tax returns due by
April 15, 2002. Those taxpayers who did not receive a check for the maximum rate
reduction tax credit because they did not have tax liability in tax year 2000, or whose tax
liability was less than the maximum amount, will be provided a tax credit to reduce their
2001 tax liability when they file their 2001 tax returns.
If I was subject to the alternative minimum tax will I be eligible for a check?
A provision was included in the bill so that taxpayers who are subject to the alternative
minimum tax will not have their credit (check) reduced. In general, persons subject to the
alternative minimum tax will receive the maximum amount.
Will my check be included as taxable income?

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For federal income tax purposes your check will not be included in income. In the case
of states which allow a deduction for federal income taxes, the check may offset the
amount of federal taxes paid and reduce the deduction. To the extent that the deduction
is reduced, the amount of state income increases, thus, the state income tax would
increase. At this time, it is not known if the Treasury Department will send notices to
taxpayers in states that allow a deduction for federal taxes reminding them to reduce their
deduction on their state income tax return by the amount of their check.
Other facts or special rules of interest
! The check being sent for the rate reduction tax credit is subject to the
refund offset provisions of the Internal Revenue Code. Thus, the credit
amount may be reduced by being offset against outstanding government
debt, student loans, past-due child support payments, state tax
delinquencies, etc.
! Taxpayers paying past taxes through an installment agreement with the
IRS will have the advance payment applied to the balance due, thus,
reducing the balance owed. No change is made in the installment
agreement and they should continue to make their usual monthly
payment.
! Taxpayers may not file amended returns or claims for a refund for tax
year 2000 as a means of collecting the rate reduction credit. Qualifying
for a check is the only means of receiving payment before a taxpayer files
his or her 2001 individual tax return.
! The amount of the check will not be included in the taxpayer’s federal
gross income for 2001.
! No repayment is required if a taxpayer receives a check (based on tax
year 2000's tax liability) but fails to have tax liability for tax year 2001.
! It is estimated that the IRS will issue more than 95 million checks, with
approximately 11 million mailed per week.
! The Office of Management and Budget has requested $115.8 million in
additional funding in FY 2001 for Treasury costs associated with
processing and mailing the checks. The Treasury’s Financial
Management Service is to receive $49.6 million for disbursements of the
checks with IRS receiving $66.2 million for administering the program.
This payment includes all administrative costs as well as the costs
associated with postage, check-writing paper, envelopes, overtime,
software programs, printing, processing, as well as claim and
reconciliation costs.