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If you took a credit on your 2006 federal tax return for the telephone excise tax, you will receive a 1099 for the interest portion of that refund. You are required to include this interest amount on your 2007 federal tax return as taxable income. This will result in you paying income tax on the portion of your refund that represented interest paid.

Claiming the Excise Tax Refund

About one year ago, on January 8, 2007, my weekly article for The INside Edge talked about the refund each taxpayer could claim for telephone excise tax incorrectly charged on long distance calls during the 41 month period of March 1, 2003, through July 31, 2006. A one-time opportunity to claim a refund on the 2006 federal income tax return was provided to all taxpayers.

In my article titled “Don’t Miss Your Tax Credit for Telephone Use”, which is included in the archives, I explained how taxpayers were given two options for calculating their refund amount. The easiest method was to claim a standard amount based on the number of personal exemptions being claimed on the 2006 tax return. The alternative was to complete Form 8913, which required researching the actual taxes paid by going back through all statements reflecting long distance or bundled telephone services for the 41 months.

Based on the guidance provided by the IRS, I would assume that most taxpayers claimed the standard amount which ranged from $30 for one personal exemption to a maximum of $60 for taxpayers with four or more exemptions.

1099 Surprise

Each taxpayer that claimed the excise tax credit on their 2006 tax return will receive a Form 1099 for year 2007 for the interest portion of that refund. The 1099 will come on IRS letterhead with a federal identification number of 38-1798424. If you completed Form 8913, you also calculated the interest portion. Your 1099 should match that amount. If you chose to take the standard amount based on the number of personal exemptions, the interest amount was already included.

Your first reaction may be that you never received a check for the refund, so how could you be required to include the interest portion as taxable income? Since the refund was reflected as a credit on your 2006 tax return, it either reduced the tax you had to pay when you filed your tax return in 2007 or it increased the tax refund that you received. Either way, you did receive the value and, therefore, do owe tax on the interest portion.

Business Deductions

If a sole proprietor or business entity claimed the telephone excise tax refund, not only the interest, but the entire refund may be taxable. This would be the case if the excise tax was originally used as a business tax deduction on a prior tax return. Any amount of the refund that reduced past taxes must now be included as income.

Summary

What started out as a simple tax credit has boomeranged back to snatch a portion of the refund! But don’t forget to include the 1099 information on your 2007 tax return. If you do, you may be getting another letter from the IRS in 2008 assessing a penalty for underreporting taxable income! Your original refund may get whittled away to nothing!

If you neglected to claim your telephone excise tax credit on your 2006 return, you can file an amended return…that is, if you think it is worth your time!

Elaine E. Bedel, CFP®, is president of Bedel Financial Consulting, Inc., a fee-only wealth management firm providing personal financial planning and investment management services. For more information, visit their website at www.BedelFinancial.com or email to ebedel@bedelfinancial.com.

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