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Rebates: Spend or Save?

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RISMEDIA, Feb. 27, 2008-(MCT)-The success of the 2008 Economic Stimulus Act hinges on what people do with their rebate checks, Paducah tax preparer Ray McLennan says.

“About half my clients tell me they’re going to spend the money, and the other half are going to put it in the bank,” he said. “I guess it’s going to have some effect, but it may not be as great as what they think.”

Starting in mid-May, the government will send about $69 billion to low- and middle-income people. President Bush and Congress are betting people will spend their checks on goods and services, but the jury is out amid mounting consumer debt.

Chicago tax law information firm CCH Inc. commissioned a nationwide survey of 2,020 adults, which found that 54% of people working full time or self-employed would use the rebates to pay down debt, 29% would save the money, and only 17% would spend it.

The Congressional Budget Office and Joint Committee on Taxation estimate the new law will boost direct spending by $42 billion in fiscal 2008-2009 but increase budget deficits (or reduce future surpluses) by $124 billion over the next decade.

Regardless of the effects, people won’t get a rebate unless they file a return. That especially includes seniors who don’t ordinarily file but are entitled to $300 individually or $600 as a couple, said McLennan, a former Internal Revenue Service agent.

“I’m afraid that some of these people have not filed for years,” he said. “They may be in a nursing home but receive Social Security and qualify, but not file.”

Social Security and Railroad Tier 1 retirement recipients must list benefit amounts on line 20a of form 1040 or line 14a of form 1040A, even if none is taxable, McLennan said. He noted that some tax software may not list the amount if none is taxable, so people may have to override to enter the correct amount.

“The only way the IRS is going to know that you have qualifying income is if you put it on your tax return,” he said.

Business boost

Paducah Area Chamber of Commerce President Elaine Spalding says the checks should stimulate retailing but may not be enough to help the auto and home markets.

“Typically people would buy something they’ve been holding back on. My husband and I are talking about a new digital television,” she said. “We want folks to spend their checks here to stimulate the local economy rather than ordering something off the Internet.”

The law targets $45 billion in temporary tax deductions for businesses by:

- Offering immediate 50% depreciation on personal property bought this year and with a depreciable period of up to 20 years.
- Raising total deductions on property purchased by companies this year from $128,000 to a record $250,000.
- Construction, trucking and other equipment-intensive businesses could benefit from the added depreciation, said Chamber board Chairman Mike Karnes, a Paducah accountant. But McLennan said companies who finance equipment rather than pay cash could wind up making payments with no offsetting depreciation after the first year.

“It can help you short-term,” McLennan said. “But it’s something I caution my clients about.”

Copyright © 2008, The Paducah Sun, Ky.
Distributed by McClatchy-Tribune Information Services.

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