This week, Gail explains why you may be paying less each month to the phone company.

Dear Friends-

If you have noticed a slight drop in your phone bill in the past couple of months you can thank the Internal Revenue Service. On Aug. 1st, the agency stopped collecting excise tax on long-distance calls, which it’s been doing since — are you ready? — 1898!

After losing five cases in federal appeals courts, earlier this year the Treasury Department finally agreed to drop the charge and refund all such taxes paid between February 28, 2003 and August 1, 2006. You can apply for a refund when you file your 2006 income tax return.

Déjà Vu

In what is reminiscent of the alternative minimum tax, the long-distance excise tax was originally targeted at wealthy Americans, since they were theoretically the only ones who could afford to own the new-fangled gadget. But it eventually spread to mainstream Americans as telephones became widespread “necessities” instead of rare “luxuries.”

Treasury Secretary John Snow described it as “an out-dated, antiquated tax that has survived a century beyond its original purpose and by now should have been ancient history.” He’s called on Congress to eliminate “the remainder of this antique tax by repealing the excise tax on local service as well.” (Don’t hold your breath.)

Ka-Ching

While it may have only added a dollar or so to the average household’s monthly phone bill, when you multiply this by every home and business with telephone service you can see how this seemingly tiny amount adds up. By the Treasury Department’s own estimate, it could end up refunding as much as $10 million.

The good news is that to receive a refund you don’t have to resurrect all of your phone bills dating back to March 2003. The IRS looked at data provided by phone companies and came up with an average amount of tax paid based on the number of individuals in a household. From this they came up with “standard” refund amounts tied to the number of exemptions you claim on your tax return:

Exemptions Standard Refund
1 ----------------$30
2 ----------------$40
3 ----------------$50
4 ----------------$60

In other words, a family of four will get $60 back. ($60 is the maximum refund.)

“Standard” or “Actual”?

You also have the option of requesting a refund of the exact amount of long-distance tax you paid over the relevant 41-month period. Say you’re single and live on the East Coast while all of your friends and relatives live out West, and you happen to be long-winded. In this case, there’s a good chance you paid more than the “standard” $30 in long-distance taxes.

But before trying to figure out what you actually paid, you should weigh the potential costs. First, there’s the time spent digging up your old bills. In addition, unless you’re a packrat, you’ll need to get copies from your long-distance provider. If the company charges for duplicate statements, it’s probably not worth it.

Why is the government only refunding 41 months’ worth of the tax? Because, as the IRS explains, under the legal statute of limitations the agency “is generally not permitted to refund taxes that were paid more than three years before the date on which the refund program was announced.”

How to Claim

If you’re claiming the standard refund, you will simply enter this amount on a special line that will be added to the 2006 income tax return. If you want to claim a refund of the actual amount of tax you paid, you will have to fill out Form 8913 and attach it to your return.

Businesses and non-profit organizations are also eligible for refunds. They, too, will have a choice of using standard amounts (to be announced soon) or researching their records to determine the amount of tax paid. This information will go on Form 8913.

You've Got to Ask!

It’s critical to understand this: You won’t get a refund if you don’t apply for it. By IRS estimates, between 10 and 30 million Americans do not have enough income to require them to file a tax return.* Yet these same individuals probably paid long-distance excise tax and are owed refunds.

“The real challenge for us is reaching people who are not obligated to file,” says an IRS spokesperson. Many of these individuals are elderly. The agency plans to work with community organizations and AARP to get the word out.

There will be a simple form for folks who don’t have to file a tax return. They can apply for this one-time telephone tax refund by filing Form 1040EZ-T.

Churches are in a similar situation as they do not have to file income tax returns. Neither do smaller non-profit groups. These entities will apply for the long-distance tax refund by submitting Form 990-T.

Etc.

Your long-distance tax refund won’t come in a separate check. It will be added to your regular tax refund (if you are eligible for one). You can request that it be direct-deposited into a bank account. The amount you receive will include interest. Internet long-distance service also qualifies for this refund.

For more information, visit the IRS website, www.irs.gov. Type “Telephone Tax Refund” in the search box.

Make sure your elderly relatives know about this.

Hope this helps,
Gail

*These are the Adjusted Gross Income (AGI) thresholds for 2005. Individuals with income below these amounts did not have to file an income tax return:

Filing Status

Single, under age 65 --------------AGI: $8,200

Single, age 65+ ---------------------AGI: $9,450

Married, joint and -------------------AGI: $16,400
both under age 65

Married, joint and -------------------AGI: $17,400
one person is 65+

Married, joint and -------------------AGI: $18,400
both are 65+

These amounts will be adjusted (increased) for the 2006 tax year.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.