Contrary to assurances given Gov. Kenny Guinn when lawmakers were considering his tax rebate plan, the IRS served notice Friday they want a piece of the action.
In fact, recipients of nearly half the 1.9 million checks that started arriving in mailboxes Saturday will owe some taxes on the money.
The original plan was a direct rebate of whatever Nevadans paid to register each vehicle in 2004 and the Internal Revenue Service sent Guinn a letter saying those rebates would not be taxable.
But the Nevada Legislature changed the plan saying too many people would get back just a tiny check for their older car or truck - some less than $10.
According to data from both the Department of Motor Vehicles and legislative staff, 926,248 of those checks would have received less than $75 and 120,000 of those would have gotten less than $25. The average check will be about $142.
So lawmakers set the minimum check at $75. In addition, they voted to give every senior who no longer has a registered vehicle a check for $75.
According to an IRS letter issued Friday, those amendments changed the rules. An IRS press release says all seniors getting a check will owe taxes on the full $75 they receive because it's not a rebate but income under federal law.
In addition, everyone getting back more than they paid to register a vehicle will have to pay taxes on the difference. If, for example, it cost $33 to register that car and the owner received a $75 rebate check, he or she owes taxes at whatever rate they pay IRS on the $42 difference - again because, legally, it's income.
Michael Hillerby, chief of staff to Guinn, said the governor's original plan was better because it avoided any tax liability.
"We knew because of the IRS ruling this was coming because the payment is not related to what they paid so it's income," he said. "We still think the original proposal was strongest but, in order to get the votes, get that thing out of there, we compromised."
Sen. Bob Beers, R-Las Vegas, one of the first to call for a tax rebate, said the tax liability isn't a surprise. A CPA, he raised that issue several times during the session.
"I think everyone who fought with this plan during the session knew we were creating taxable impact," he said.
He said that's why he originally proposed not charging Nevadans when they renewed their registration this year, giving them a direct savings that is non-taxable.
Beers said another group that will owe taxes on their rebate check is taxpayers who took a deduction on their registration fees in 2004. But most of those are middle income and above or business owners.
Both Beers and Hillerby said, in any event, it will make little or no difference to most taxpayers. Those who pay will find it costs them as little as $2 or $3 in taxes.
"And a lot of seniors make so little money they're not even required to file a tax return," Hillerby said.
In the end, he said, the important point is that people received a tax rebate from the state of Nevada.
"Some may be frustrated they have to pay a couple bucks in taxes but the bigger picture is we got a tax rebate out to the people," he said.
-- Contact reporter Geoff Dornan at email@example.com or 687-8750.