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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Most people probably think that once a new tax was enacted it will never be repealed.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.

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Telephone Tax Refund: New Formula for Businesses & Tax-Exempts

The IRS has finally come up with a safe harbor calculation for businesses and tax-exempt organizations so they don't have to pull up 41 months of old telephone bills to get their telephone tax refund.

To get their refunds, businesses will have to attach Form 8913, Credit for Federal Telephone Excise Tax Paid to their tax return. (It appears the instructons for this form are not yet available on the IRS website.) This applies to sole-propietors, partnerships, corporation and tax-exempt organizations.

You can still pull out those old phone bills to get a refund of the exact you paid. If you want to use the new formula you'll need a copy of your April 2006 and September 2006 phone bills. The refund will be based on the difference between the percentage paid for the federal excise tax on these two bills.

I know this sounds confusing, so let's look at an example. Let's say in April 2006 your phone bill was $1000 including $28 of federal telephone excise tax, or 2.8%. In September 2006, your phone bill was $1100 including $16.50 excise tax, or 1.5%. The difference between the April 2006 percentage of 2.8% and the September 2006 percentage of 1.5% is 1.3%. This is your business' long-distance excise percentage which you use to calculate your telephone tax refund.

So say you had $41,000 in telephone expense for March 2003 through July 2006. Multiplying this amount by 1.3% gives you your tax refund of $533.

As with nearly everything with the IRS, there are limits. If your business had 250 or fewer employees, the refund percentage is limited to 2%, otherwise it is limited to 1%.

Sole-proprietors who file Schedule C, residential rental property owners who file Schedule F, and farmers who file Schedule F and gross business income greater than $25,000 have three options when calculating their telephone tax refund.

  1. Use the standard amounts which cover both business and personal expenses,
  2. Use the formula for their business expense and actual for their personal ones, or
  3. Use the actual amounts for bothe business and personal expense

If your Schedule C, E or F business had gross income of less than $25,000 you can either elect to receive a credit for the exact amount paid or the safe harbor amount for individuals based on the number of personal exemptions on your return, but not both.

For more information on the Telephone Tax Refund for businesses, see the IRS Notice IR-2006-179 or their FAQ for Business Telephone Tax Refund.

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