Filing Extensions to be Costly for Some

Procrastination has a price

By Kaye A. Thomas
Posted February 11, 2008

Getting an extension of time to file 2007 income tax returns may mean losing the "prebate bonus."

Every year, millions of taxpayers delay filing their income tax returns beyond the usual April 15 deadline by filing for an extension. A filing extension doesn't postpone the deadline for paying any tax you may owe, but gives you up to six more months to gather and organize your tax information and make sure your return is correct. In a normal year you don't incur any special costs if you pay enough tax by April 15 and meet the extended deadline of October 15 for filing your return. Because of the economic stimulus rebate checks to be sent out this summer, 2008 isn't a normal year. For many people, filing for an extension will mean a long delay in receiving their stimulus rebate. And for some, it will mean losing the benefit altogether.

The prebate bonus

The rebate actually relates to your 2008 taxes. Most people will receive it in the form of a "prebate" check (or direct deposit) during the spring and summer of 2008, long before returns are filed for 2008. The IRS will determine who receives checks, and in what amount, on the basis of 2007 income tax returns. Taxpayers will fall into three categories:

By far the largest group will receive a prebate check that correctly reflects the amount that would be allowed as a credit based on their 2008 income and other factors. That's the simplest situation.
Some people won't receive a prebate check, or will receive a check that's smaller than the amount indicated by their 2008 income and other factors. Perhaps their income was too high or too low to receive the full amount in 2007, or an additional child was born in 2008. These people will be able to claim any additional amount to which they're entitled on their 2008 income tax returns. They get the full amount to which they're entitled, but some or all of the benefit is delayed (a credit instead of a prebate).
The third group is the most interesting: these are people who will receive a prebate check based on their 2007 tax returns that's larger than the credit that would be allowed for 2008 because of a change in income or other factors. These people get to keep the extra money, which we might call the prebate bonus. It's cash they wouldn't have received except for the eagerness of Congress to push this money out into taxpayers' hands ahead of the filing season for 2008 income tax returns.

Who gets prebate bonus

The prebate provides a bonus only in situations where the check includes money you wouldn't get based on your 2008 income or other factors. Here are some examples:

You earned enough to qualify for the prebate in 2007 but won't have enough income to qualify in 2008.
You claimed a qualifying child as a dependent in 2007 but won't be able to claim that child in 2008, perhaps because the exemption goes to a former spouse this year.
Your income for 2007 was below the range where the credit is phased out, but your 2008 income will be higher.

These situations and others present the possibility of receiving a prebate bonus.

Losing the prebate bonus

If you receive a prebate bonus, you aren't under any obligation to return it to the government when you file your 2008 income tax return. In effect, people generally receive the larger of two amounts: the prebate check based on your 2007 return or a credit allowed on your 2008 return. But you don't get the prebate bonus unless you get a prebate check. If your 2007 income qualifies you for a larger benefit, but you never receive the check, you'll have to claim the smaller amount as a credit on your 2008 return.

This is only a problem for people whose situation changes to reduce the benefit in 2008. For the vast majority of taxpayers, the benefit for 2008 will be the same as for 2007.

If you anticipate a prebate bonus, you greatly increase your chances of receiving it if you file your 2007 income tax return by April 15. The IRS will do its best to get checks out to everyone who qualifies, but the number of potential recipients is huge — over 100 million — and the first priority will be sending the checks to people who filed on time, without extensions. Filing later won't necessarily preclude you from receiving a prebate, but Congress put a December 31 deadline on the prebates. It's likely that the IRS won't be able to process prebates for all people filing on extension, especially those filing near the final deadline of October 15.

Some people can't file by April 15 because the information isn't available. Many others file on extension simply to postpone an unpleasant task, This year, for some of these people, procrastination has a price.