Ring Up Savings on Your 2006 Tax Return
Billions of dollars in wrongly collected telephone excise taxes will boost this year's refunds.
By Kevin McCormally, Editorial Director, Kiplinger.com
January 15, 2007
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The story is so implausible that many Americans are learning about it on Web sites that exist to debunk urban myths. Could it possibly be true?
In the midst of a costly war, the government has killed a tax created 109 years ago to help pay for a war.
The IRS will refund about $13 billion collected in the 41 months leading up to the abolition of the levy last summer.
And, the government will even pay interest on the money erroneously taken out of our pockets.
Come on!
But it is true. Read on to see how to put cold, hard cash in your pocket.
Hanging up on the telephone tax
At issue is an excise tax on long-distance telephone calls born in 1898 as a 1% luxury tax to help finance the Spanish-American War (Remember the Maine!). Over the years, Congress often tried (a few times successfully) to kill the tax, but the sneaky little revenue raiser that shows up on people's phone bills has been hard to ditch. The tax soared to as high as 25% during World War II and was 10% during the Vietnam War. After that it dropped as low as 2% before settling at 3% in the 1980s. In 2000, Congress voted to repeal the tax, but President Clinton vetoed that legislation.
So, what obliterated the long-distance tax? Technology played a big role.
The tax applied to long-distance charges based on the time and distance of the call. Although anyone younger than 30 might not remember, that's the way things used to work. Generally, the farther away you called, the more you paid for each minute you talked. In recent years, though, the distance part of the equation has disappeared with the advent of cell phones and bundled plans. And that's the rub.
Some pretty smart lawyers for some pretty big phone users -- American Bankers Association, Hewlett-Packard, Home Depot, OfficeMax and WalMart, among others -- challenged the government in court for applying the tax to charges that were not based on distance. The companies won case after case after case and, finally, the government gave up, pulled the plug on the tax effective August 1, 2006, and promised refunds of money erroneously collected since March 1 of 2003. (The IRS says the statute of limitations won't let it refund taxes collected before that date.)
How to get your money
First the good news: The IRS has come up with a surprisingly easy way for most individuals to claim their just rewards. It is practically a no-questions-asked tax credit you can claim on your 2006 income tax return. It goes on line 71 of the Form 1040, line 42 of the Form 1040A and line 9 of Form 1040EZ. If you don't have to file a return, the IRS even has created a special form just to request a telephone tax refund: the 1040EZ-T. (Don't expect the EZ-T to be easy, though, if you're filing for a refund for someone who died before 2006 -- and that's why they don't have to file a return -- but who paid the telephone tax during the refund period.)
If you're willing to accept the IRS's estimate of how much you deserve -- rather than going through 41-months' worth of old phone bills -- you can claim a credit based on the number of exemptions you claim on your return. The more exemptions you claim on this year's return, the bigger your credit. Here's the drill.
One exemption: $30. This is what you'll get if you are single and claim no dependents, for example.
Two exemptions: $40. This will be the standard for a married couple with no children.
Three exemptions: $50. A couple with one child will get this amount, for example, as will a single mom with two children.
Four or more exemptions: $60. A couple with two or more children gets the top credit.
The IRS says it came up with the figures based on telephone usage data, and the amounts include interest back to the time the money was collected.
If you spent an average of more than $25 a month for long-distance service during the refund period, you deserve more than the $30 standard credit. But you might well decide it’s not worth the effort to reclaim the extra money once you see the Form 8913 created for figuring the credit. The IRS guesses it will take an average of 13 hours and 37 minutes to complete the form. Basically, you need to tote up the federal tax you actually paid on long-distance calls between March 2003 and August 2006 (the tax on local calls doesn't count toward the credit), group the payments in three-month increments, and then figure the interest you're due on each quarter's tax (using factors that range from 4.7% to 26%).
The credit shows up in the "payments" section of the tax form, so you'll get the benefit regardless of whether you itemize deductions. It will reduce your tax bill or increase your tax refund dollar for dollar.
Business credits
Businesses don't get a chance to claim a fixed dollar credit. They must either pinpoint exactly how much long-distance tax they paid during the 41-month period or use an optional formula created by the IRS to allow firms to avoid going through every phone bill.
Under the formula, a company will figure the telephone tax as a percentage of its phone bills for April and September of 2006. (The September bill is the first without any tax on long-distance calls.) Then it subtracts the percentage for September from the one for April to get an estimate of the percentage of the bill that represents the refundable tax. Finally, the company multiplies that percentage by its phone bills from March 2003 through July 2006 to determine the refund. The percentage is capped at 2% for firms with 250 or fewer workers and 1% for larger firms.