Utility Surcharges for Needy Aren’t Deductible

Q: There are some minor charges on two of my utility bills that I do not understand. My gas bill has a “state regulatory fee” and a “low-income fund surcharge.” My telephone bill has various fees and surcharges, including one for communication devices for the deaf and disabled. Who gets the income from these charges? Also, are any of these fees considered “other taxes” by the Internal Revenue Service and therefore deductible? --W.C.P.

A: The funds generated by the fees you mentioned are administered in a variety of ways, according to Pacific Bell and Southern California Gas Co. And, to answer your second question, none are deductible on state and federal tax returns.

California residents currently pay a 0.3% surcharge on all telephone calls made within the state to provide free telecommunication devices for the deaf. The money is administered by a trust fund that was established when the levy was approved. Similarly, funds generated by the 0.69% surcharge on intrastate calls for emergency telephone systems are funneled into a special trust fund that supports 911 service throughout the state. Californians also pay a 2.5% surcharge on all long-distance calls made within the state to help provide low-cost telephone service to the needy. The state regulatory fee on telephone bills goes toward supporting the state Public Utilities Commission, the government agency charged with regulating all utilities in California.

Moving on to your gas bill, the “low-income fund surcharge” is levied by all gas companies throughout the state at the behest of the Legislature. Funds generated by the fee are used to provide subsidized gas service for needy families. Gas companies administer the fund and provide low-cost service to households meeting minimum income standards. The regulatory fee, like the one charged by phone company, goes toward supporting the PUC’s operations.

According to spokesmen for both utilities, these levies are not considered taxes deductible by the IRS. Why? The gas company said it was because the low-income families that it serves with its subsidized gas program are not “an IRS-defined charitable group.” And a phone company spokesman said its fees were considered “sales or excise” taxes, which are no longer deductible. Our tax experts agree: The levies--nickels and dimes that add up to dollars by year-end--are not tax deductible.

Determining Taxes on Stocks, Dividends

Q: I have participated in a dividend reinvestment program since 1982 and expect to sell all the shares I hold in this company sometime this year. During the past seven years, I have paid income taxes on the dividends I received, even though they were reinvested in additional stock. How do I determine my tax obligation on the gain I received from the sale?--J.B.

A: If your records are complete and up to date, you should have no problem determining your tax bill. The price you paid for the stock you purchased with your reinvested dividends becomes your tax basis in these shares. To calculate your taxable gain, simply subtract the basis from your sales price. For example, an admittedly simple one, let’s say you had reinvested $100 and had purchased four shares. Because you would have paid income tax on the $100 during the year in which the dividend was earned, each of the shares you purchased would carry a taxable basis of $25. If you sell those shares for $50 each, your taxable gain is $25 per share, or a total of $100.

Your calculations to determine gains on stock purchased over seven years will be more complicated than the above example, but the process will be eased considerably because you intend on selling all your shares at once. If you were selling only a part of your holdings, the situation would be far more complicated. In that case, our tax experts say, you would have to specifically designate the shares you intended to sell, identifying them by their purchase date and price.

Most dividend reinvestment programs send their investors quarterly reports detailing the cash value of their dividends and the number of shares--with their sales price--credited to their accounts. If you have saved these over the years, you should know exactly the tax basis of every share you are selling. If you haven’t saved them (tsk, tsk), you can still retrieve the information you need. The investor relations department of the company should be able to help you unravel your account and provide you with new copies of your purchase records.

By the way, this is probably a good time to remind everyone who participates in a dividend reinvestment program that complete and thorough record-keeping is more than a secretarial chore; it’s an absolute necessity. If you are audited, the IRS can make you prove the taxable basis of the shares you are selling, and, if you can’t, you could be forced to pay tax on your entire sales proceeds.

NOTE: Last week’s column contained some erroneous information inadvertently provided by the Social Security Administration. A reader asked if her Social Security or Supplemental Security Income benefits would be reduced as a result of her marrying a man who also receives Social Security and a private pension.

The response was that her Social Security benefits would not be reduced, which is true. However, it is not true that Supplemental Security Income benefits are reduced, dollar for dollar, by the amount of her husband’s income. Because of a recent change in Social Security regulations, the reduction would be far less. In the hypothetical example we used, where the reader is receiving $250 in monthly SSI benefits, her payment would be reduced by just $6 if her husband had a monthly income of $400. Her SSI payments would be eliminated only if her husband’s monthly income were $787 or more.