Expert Advice - January 2006

Nevada Tax Rebate Checks

Taxable or Not?

In 2005 the state of Nevada made two types of tax surplus rebate payments to taxpayers. The first type was a $75 payment to individuals 65 or older, who had a state identification card from Nevada but no vehicle registered in Nevada during 2004. The second type was a payment to taxpayers who registered a vehicle in Nevada during 2004. There are possible tax consequences for both individuals and businesses receiving tax rebate checks.

Payments to taxpayers who did not register a vehicle during 2004

The state of Nevada paid $75 to each individual 65 or older as of January 1, 2005, who had an identification card from the Nevada Department of Motor Vehicles, but no vehicle registered in Nevada during 2004. This type of payment is taxable as ordinary income. If the taxpayer has sufficient income to file a return, the rebate should be reported as "other income" on line 21 of Form 1040.

Payments to taxpayers who registered a vehicle during 2004

All those who registered a vehicle in 2004 paid a basic governmental services tax and a vehicle registration fee. The basic registration fee for a passenger car was $33. The state of Nevada made a payment to each taxpayer who registered a vehicle in Nevada during 2004. Both business and individual taxpayers received these payments. Taxpayers received at least $75, but no more than $275 per vehicle registered during 2004.

The federal income tax treatment of this type of payment depends on whether the taxpayer paid $75 or more in basic governmental services tax and fees to register a vehicle during 2004. Note: The Nevada rebate did not apply to supplemental governmental services tax in Churchill, Clark and Washoe counties or amounts paid for sales taxes, specialty plate fees, title fees or other miscellaneous charges. So those amounts are not included in the determination of whether the rebate is taxable.

If more than $75 was paid

For taxpayers who paid $75 or more in basic governmental services tax and fees to register a vehicle during 2004, the entire state payment is treated as a refund of the tax and fee paid to register the vehicle. Generally, taxpayers who receive a refund of a tax or fee that they deducted on their federal income tax return for a prior year must include the amount of the refund in income up to the extent they benefited from the prior deduction.

Individual taxpayers who filed a Form 1040A or Form 1040EZ for 2004 did not deduct the tax or fee; therefore the refund of the tax and fee is not taxable. Individual taxpayers who filed a Form 1040 with a Schedule A for 2004 may have deducted the tax. Those taxpayers who deducted the tax must include the refund in income up to the extent they benefited from the deduction. For more information for individual taxpayers, see the topic of Recoveries under the Miscellaneous Income section of IRS Publication 525, Taxable and Nontaxable Income.

The basic governmental services tax and registration fee would have been deductible if the vehicle was used by a business, including an individual taxpayer who filed a Schedule C or F. Business taxpayers who deducted these amounts must include the refund in income to the extent they benefited from the deduction. For more information for small business taxpayers, see the topic of "Recovery of items previously deducted" under the heading of Other Income in the Business Income section of IRS Publication 334, Tax Guide for Small Business.

If less than $75 was paid

For taxpayers who paid less than $75 in basic governmental services tax and fees to register a vehicle during 2004, the amount by which the $75 received is greater than the amount of tax and fee the taxpayer paid is taxable as ordinary income. Individual taxpayers should report this portion as "other income" on line 21 of Form 1040.