The stimulus checks sent out by the IRS last spring have added a new wrinkle to the tax filing process this year, with the introduction of the Recovery Rebate Credit.

The credit, which allows taxpayers who received a smaller stimulus check than they should have last year to claim the difference this year. This has created significant confusion for people filling out tax returns, according to Bill Brunson, spokesman for the Internal Revenue Service, who said that about 7 percent of the returns received so far this year have included an error related to the Recovery Rebate Credit.

Generally speaking, taxpayers who received the full stimulus payment last spring — $600 for individuals, $1,200 for married couples filing jointly and an additional $300 for qualifying children younger than 17 — are not eligible for the credit. Because the stimulus was intended as an up-front reduction of 2008 taxes, but was calculated based on individuals’ income and filing statuses in 2007, only those who saw their tax statuses change significantly between 2007 and 2008 are likely to receive the credit, Brunson said.

“It actually became a credit on the 2008 return, prior to that, it was an economic stimulus payment that was to be paid to taxpayers on or before Dec. 31. As of that particular time, we were no longer allowed as an agency to cut a check to a taxpayer, but there still existed that issue of that tax law that was enacted, and it came into effect on the 2008 return, and it came into effect as the Recovery Rebate Credit.”

Only about 5 percent of taxpayers should be entering anything but zero under the Recovery Rebate Credit line on their tax forms — line 70 on Form 1040, line 42 on Form 1040A or line 9 on Form 1040EZ — but Brunson said filers have been filling in the space with the $600 they received last year, or last year’s tax refund.

Prineville certified public accountant Michael Mohan said he’s seen some confusion over how last year’s stimulus checks factor into this year’s taxes, but mostly, people he’s worked with have been surprised to learn it’s still possible to receive the stimulus funds they missed out on last year.

“I don’t think the awareness has been real high that the Recovery Rebate Credit is there,” Mohan said. “The people that have qualified have kind of been, ‘Oh, really? I get money back? Cool.’”

Confusion over how to properly account for the credit has created a particular problem in Oregon, according to Derrick Gasperini, spokesman for the Oregon Department of Revenue. Because the state’s income tax is closely tied to the federal income tax, allowing filers to deduct taxes paid to the federal government when calculating the income that is subject to the state tax, errors on the federal forms are passed through to the state forms.

“What complicates it for the Oregon return is because the stimulus payments received last year were an advance payment of a future tax cut, it was a rebate of tax,” he said. “When people prepare their Oregon tax return, there is a spot for the federal tax subtraction on your Oregon return, your stimulus payment needs to be subtracted out of your federal tax liability on your Oregon return.”

By failing to subtract the stimulus from taxes paid to the federal government, Oregon taxpayers understate their taxable income for state purposes. It’s too soon to determine how many Oregon taxpayers have made the mistake this year, but Gasperini said electronic filing has helped reduce the number of math errors in recent years.

Last year, 59 percent of Oregon’s state tax returns were filed electronically, and about 5 percent of those returns contained at least one error, with the error rate on paper returns slightly higher, he said.

Lynn Stegmann, a tax preparer with Bend Tax Service, said her office has received several calls from customers unsure of how to factor last year’s stimulus payments into this year’s taxes.

Because the stimulus was intended as an up-front reduction of 2008 taxes, but was calculated based on individuals’ incomes and filing statuses in 2007, filers who saw their incomes go up or down dramatically in 2008 or added an additional dependent child have found themselves eligible for the credit, Stegmann said.

“They based it on (2007), just to get an idea of what to give people, but it was really on 2008’s income,” said Stegmann. “These were just kind of estimates put out there on 2007’s income, but it’s really 2008’s stimulus, and that’s what’s got everybody confused.”

Mohan said most of the stimulus-related confusion he’s seen from customers lately has been tied to the more recent stimulus bill, and the Making Work Pay tax credit, which provides up to $400 for individuals and up to $800 for couples filing jointly. For most taxpayers, this tax credit will be paid out through a reduction in the taxes withheld from their paycheck, rather than a check.

“It doesn’t affect the way you file your taxes,” Mohan said. But some people, because everyone talked about stimulus, they thought there was another check coming. So we get those phone calls.”

Diana Brauchler of Tax Minimizers in Redmond said taxpayers confused about the credit should visit the IRS Web site. By entering their Social Security number, filing status and number of exemptions, the Web site will be able to tell taxpayers whether they are eligible.

Unclaimed refunds

The Internal Revenue Service has unclaimed refunds totaling more than $16 million that are awaiting the roughly 21,000 Oregonians who did not file a federal income tax return for 2005, the agency announced Wednesday.

The IRS estimates the average refund amount in Oregon is $467.

To collect the money, a return for 2005 must be filed with the IRS no later than April 15, 2009. Citizens entitled to a refund forfeit their rights to the money if they do not file a 2005 tax return by April 15, 2009.

The IRS reminds taxpayers seeking a 2005 refund that their checks will be held if they have not filed tax returns for 2006 or 2007. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

Current and prior year tax forms and instructions are available on the Forms and Publications Web page of IRS.gov or by calling 800-829-3676.

Native Americans living in Oregon may be eligible for a full or partial exemption from state income taxes, according to the Oregon Department of Revenue.

To qualify, an individual must be an enrolled member of a federally recognized tribe, must have been living on federally recognized Indian country at the time the income was earned, and the income must have been earned while working on federally recognized Indian country within Oregon. Only income that meets all three criteria is recognized as exempt from the state income tax.

To qualify for the deduction, individuals must fill out the Exempt Income Schedule for Enrolled Members of a Federally Recognized American Indian Tribe form and send it in with their Oregon tax returns by April 15, or by Oct. 15 with an approved extension. The form and instructions are available on the Department of Revenue Web site, www.oregon.gov/DOR. For more information, visit the Web site or call 800-356-4222.

• People who received a stimulus check of $600 for individuals, $1,200 for couples filing jointly, and an additional $300 for qualifying dependent children last year generally do not qualify for the Recovery Rebate Credit.

• Those who qualify for the Recovery Rebate Credit will have it added to their 2008 tax refunds, not in the form of a check.

• Seniors or retirees who did not file a tax return in 2008 may qualify for the credit, as well as people who added children to their families in 2008.

• Stimulus payments received last year are not taxable and will not reduce this year’s tax refund.

• Certain types of tax preparation software assumes the taxpayer will receive the Recovery Rebate Credit, giving the user the impression the stimulus payment is taxable when it is entered and subtracted from the Recovery Rebate Credit.

• Entering the incorrect figure under the Recovery Rebate Credit line on your tax forms may delay your refund.

• Check www.irs.gov and look for “How Much Was My Stimulus Payment?” to help determine whether you are eligible for the Recovery Rebate Credit.