By Cindy Schroeder
The Cincinnati Enquirer

COVINGTON - Those in doubt about whether their 2001 Kenton County payroll tax refund is taxable should call the Internal Revenue Service or their accountant.

"If you filed a Form 1040-A or 1040EZ (last year), you don't have to worry about it,'' said Pat Brummer, IRS media specialist. "This only applies to people who itemize deductions - things like mortgage interest, high medical bills and large charitable donations.''

WHERE TO CALL

For questions about Kenton County's payroll tax refund, call the IRS help line at (800) 829-1040. Hours are 7 a.m.-10 p.m. Monday through Friday; 10 a.m.-3 p.m. Saturdays through April 15.

In other words, the refund of a tax the courts deemed illegal - then legal again - is taxable.

Last year, Kenton County officials refunded a contested payroll tax hike to about 80,000 people who worked in Kenton County in 2001 and had county payroll tax withheld, County Treasurer Ivan Frye said. The refunds ranged from $1 to $445.20.

Starting last week, Kenton County Fiscal Court began mailing the substitute Form 1099-G to the 55,000 to 60,000 workers who received a county payroll tax refund of $10 or more last year. Those people will be required to report their county payroll tax refund as income, if they itemized their deductions on last year's taxes, Brummer said.

"Look at last year's tax return,'' she said. "Is there a Schedule A attached? If there's an amount on line 5, then you have to report (the county payroll tax refund) as taxable income.''

Kenton County workers who are required to report the tax as income and fail to do so could face interest and penalties later, Brummer said.

"About a year later, you could get a notice from the IRS saying, `Why didn't you report this on your tax return?' Then the IRS will ask you to pay the tax owed with interest and penalties,'' she said.

Last October, the Kentucky Court of Appeals ruled that Kenton County did not break the law when it raised its payroll tax on Jan. 1, 2001, to help pay for a new jail.

Although the county left the overall payroll tax rate at 0.85 percent, it adjusted the rates of several levies that fund different services in the county. It increased revenues by raising the maximum amount of annual income that could be taxed from $25,000 to $80,400, the Social Security maximum.

The increased revenues were to offset general funds that the county planned to use to build a new jail.

The Court of Appeals overturned a ruling by Kenton Circuit Court Judge Patricia Summe, who had decided the increase on the payroll tax cap originally passed by Kenton County Fiscal Court was illegal. She ruled that county officials would have to give Kenton County workers who also paid city taxes a credit against the county tax.

Yet to be decided is when or if the fiscal court will reinstate the disputed payroll tax increase that the Kentucky Court of Appeals has now ruled is legal.

E-mail cschroeder@enquirer.com