The Tele-Teddy Tax Refund Coming to 2006 Tax Returns
Most people probably think that once a new tax was enacted it will never be repealed. Well, here is the exception: The Federal Telephone Excise Tax. This tax was enacted by Teddy Roosevelt way back in 1898 to pay for the Spanish American War. It was based on the how long you talked on the phone and how far away you were geographically from the person at the other end of the line. I like to think of it as the Tele-Teddy Tax!
The Federal Telephone Excise Tax stopped appearing on your phone bill as of August 1, 2006 after the federal government lost a series of court cases. And now the IRS is going to refund the taxes you paid with your phone bill between February 2003 and August 2006! As everything with the IRS, the devil is in the details.
There are two ways you can request a refund: a safe harbor amount or the actual amount.
The safe harbor amount is based on the number of exemptions you claim on your federal tax return. The beauty of this method is that it’s simple for both you and the IRS as no documentation is required. The refund will be between $30 and $60. It can be claimed on your personal return or, if you’re not otherwise required to file, you can request the refund on a new form 1040EZ-T.
The actual amount is going to be a little trickier to claim because you need to have documentation to justify the amount claimed. You’ll need to decide which the best method is for you. But based on analysis of my own phone bills, if you have more than one line you will likely do better claiming the actual amount. Provided you can dig up your phone bills dated February 1, 2003 to August 1, 2006. You need to find the line “Federal Tax” or “Federal Excise Tax @ 3%” on each bill. If you have more than one phone line, it may be listed separately for each line.
If you own a business the rules are a little trickier. As of now there is no safe harbor amount for companies and other entities. This will be a big headache of lots of companies, large and small, that will have to dig up their old phone bills. The other little tidbit is business will have to declare the refund and any interest received on their tax return for the year they receive the refund, likely 2007.
I know that’s a little twisted but here’s the tax logic. The business deducted the amount of the tax as part of their telephone expense in previous years. This reduced its taxable income and therefore its tax liability. From an income tax perspective, this tax refund is more like getting a refund from your telephone company which originally collected the tax. Anytime you receive a refund for a previously tax deductible expense it is income in the year the refund was received.
If you receive interest on your refund you will need to claim that interest as income for the year you receive it, likely 2007 in this case.
I’ll keep an eye on this and post any updates the IRS provides as filing time gets closer. In the meantime, start digging up those old phone bills. It would be nice if phone carriers tallied up the amount each customer paid in the federal excise tax and noted it on end of year statements. But I wouldn’t hold your breath.