Telephone Excise Tax Refund: Reach Out and Touch a Tax Credit

Q: Tax Playa, I've heard I'm getting a special tax credit because of my telephone bill.  What's this all about?
Geoff, Arlington VA

A: In 1891, Congress passed a "luxury tax" on long-distance telephone use in order to pay for the Spanish-American War.  In 2006, the courts told the Treasury Department that the statute was inapplicable to most modern telephone use.  As such, taxpayers will receive a rebate this year for the last several years of telephone tax that has been collected...

For more information on this, visit a special website the IRS has set up for this, http://www.irstelephonetaxrefund.info/.

The telephone tax refund is for the federal excise tax paid on long-distance calling between February 28, 2003 (when the law was first challenged in court) and August 10, 2006 (when the Treasury Department announced it would cease collecting the tax).  It affects 159 million individuals and businesses, and is worth $10 billion in 2007.

Individual taxpayers have a choice as to how they want to claim the credit:

1. They can go through their old long-distance phone bills during that period, add up the federal excise tax amount, and file Form 8913 with their 1040s.
2. They can claim a standard amount in lieu of this.  That standard credit amount is $30 for returns with one exemption, $40 for returns with two exemptions, $50 for returns with three exemptions, and $60 for returns with four or more exemptions. 
3. If individual taxpayers do not have a federal tax liability but they would like to claim a refund, they can file a special Form 1040EZ-T this year.  They must claim the standard credit amount.

Business and tax-exempt organization taxpayers also have a choice as to how they want to claim the credit:

1. They can go through their old long-distance phone bills during that period, add up the federal excise tax amount, and file Form 8913 with their business tax return.
2. They can use a special formula.  By comparing their April and September 2006 phone bills, the difference in federal tax paid as a percentage of the bill accounts for the long-distance excise tax rate.  They should then multiply this tax rate to their gross phone bills for the 2/28/2003-8/10/2006 period to get the approximate tax paid.  The rate applied cannot be more than 2% for organizations of less than 250 employees, and 1% for organizations of more than 250 employees.

Special rules exist for sole proprietors, unincorporated farmers, and individual landlords (since they file their business returns as part of the 1040).  The method differs based on gross income:

1. If their income from the business activity is less than $25,000 they can choose to use either the standard amount or an amount based on actual expenses.
2. If their income from the business activity is more than $25,000 they can choose from one of the following three options: standard personal amount alone; business formula plus actual personal expenses; actual amounts for both business and personal.  In no case can both the business formula and the standard personal amount be used.