BOONDOGGLE ALERT -TELEPHONE EXCISE TAX REFUND
February 2007
The Congress has grown accustomed to enacting tax credits versus tax rate cuts since credits are considered more politely viable. The latest credit is a one time refund for excise taxes paid on long distance coverage including cell phones. This tax was first levied back in 1898 and was used to fund the Spanish American War. After that, the government just kept on collecting the tax until last summer when a number of courts ruled it was no longer constitutional. The IRS stopped collecting the taxes and will credit back taxpayers for taxes paid from February 28, 2003 to August 1, 2006.
The first problem is the amount of the credit. The average taxpayer will probably get $60 making it difficult to cost effectively obtain the credit. The IRS has provided a standard deduction based on the number of exemptions that you will be claiming on your 2006 tax return. This standard deduction is $30 for single individuals and increases by $10 for each additional exemption up to $60; therefore, if you have more than 3 dependents, you will receive a maximum of $60 back from the standard deduction. More than 1/3 of the early 1040 filers this year did not bother claiming the credit in any way. We believe that the standard deductions will be about right for those individuals who have only one phone line.
If you have more than one phone and want to maximize the deduction, the IRS suggests that you collect all of your phone bills from February 2003 through August 2006; you can look at each bill and obtain the amount of long distance federal excise tax that you paid. You can see the problem: the time necessary to examine 41 months worth of phone bills for every phone you have and then summarize the amount of tax; it can't be worth it. Frankly, I am a little concerned about those of you who have all of your phone bills back to 2003.
What we suggest is that for each phone, you take one bill from 2003 and one bill from before September 2006, figure out the average tax and multiple by 41. Retain these bills in your tax files. In the event you are audited for 2006, the IRS will extend their audit procedures to the credit so you will need some paper to justify your number. In our tax organizer, we included form 8913, the form to claim the credit. We need you to put down in the organizer the exact number you want us to claim, hopefully calculated as we described above or some other reasonable method. If you list nothing, we will claim the standard deduction. We cannot economically add up the credit from all of your phone bills.
For businesses and tax-exempt organizations, you can also claim the refund using your actual expenses or by using a formula provided by the IRS. For companies that have fewer than 250 employees your refund is capped at 2% of your total phone bill. For businesses that have more than 250 employees your refund is capped at 1%. For sole proprietors, don't forget to include the tax paid from your business and cell phone lines.
Call Mary Erickson at Cover & Rossiter (302)-656-6632 with questions. Or, you can email us at CoverRossiter@CoverRossiter.com.