No one loves tax season. It’s the Monday of the financial calendar. But perhaps part of the pain you’re feeling is because you’re holding on to myths that make you overpay Uncle Sam. There are as many tax misconceptions as there are morning traffic, and they can cost you big money.
Misunderstanding deductions, overestimating, and underestimating credits are just a few of the wrongs that will empty your pockets and undue stress. Well, it’s time to bust some myths, clear up some confusion, and help you hang on to more money you earn. Let’s set the record straight.
All Tax Preparers Are Essentially the Same
If you hire a tax preparer, you’ll save yourself time and stress but don’t assume that just because someone has a calculator, they are an expert. Tax preparers also vary in their preparation; some are trained to do basic returns, and some are trained to do complex things like CPAs and enrolled agents. Be sure to check credentials and reviews before you entrust your taxes to someone.
After Your Taxes Are Filed, You Aren’t Going to Be Able to Change Them
Mistakes happen. The good news is that you don’t have to live with these forever. If you missed corrections or deductions, you can file Form 1040-X, an amended return. According to IRS statistics, about 3 million amended returns are processed yearly, which is not complicated or unusual to correct when mistakes are made.
The IRS Is Out to Get You
The IRS is not out there to catch taxpayers messing up. The agency does not want to become a witch hunt; it wants to collect taxes efficiently. According to IRS data, less than one percent of tax returns for those earning less than $200,000 and four percent for those earning more were audited. Most audits are routine and are instigated by a simple error or missing information. Agents ‘showing up at your door’ is more Hollywood fiction than fact. If you file honestly, you won’t have any trouble.
Filing Your Taxes Is Harder if You’re Single
Simply being single doesn’t mean more complicated taxes; married couples think they have this one in the bag. Being single doesn’t make taxes more complex. It’s easier to file taxes as a single filer because you have just one income to deal with and less to consider. Joint filers may benefit from a few things, but single filers are entitled to the same credits and deductions.
You Don’t Have to File If You Didn’t Make Much
Some believe they don’t have to file a return without taxable income. Technically, this may be true for some taxpayers, but if you don’t file, you could miss out on many refunds or tax credits, such as the Earned Income Tax Credit (EITC). And even if you make very little income, filing could put money back in your pocket.
You Can Deduct Whatever You Want for a Business Expense
Many self-employed people think they can write off just about anything, and that’s one of the fastest ways to get into trouble with the IRS. To be deductible, business expenses must be ordinary and necessary. In other words, those weekly coffee runs probably won’t qualify unless you meet a client each time.
Student Loan Interest Isn’t Deductible If Your Parents Help Pay
Here’s a lesser-known fact: The IRS treats interest payment like you paid it yourself, even if someone else paid it on your student loan. That means you can still deduct up to $2,500 of student loan interest even if your parents wrote the checks. This is a valuable way to lower your taxable income.
Tax Extensions Grant You Further Time to Pay
Tax extensions give you more time to file your return but not more time to pay your tax bill. If you owe taxes, any money not paid by the April deadline will begin to draw interest and penalties. If you can’t pay the entire amount, however, paying as much as you can upfront will help reduce the long-run amount you owe.
Side Gigs Aren’t Taxable If You Get Paid Cash
Working under the table doesn’t mean you don’t owe taxes. The IRS requires you to report all income, no matter how you receive it. If you make over $600 on a side gig, you’ll typically get a 1099 form, though your income is still taxable even if you don’t. If you skip this step, you will encounter troubles down the road.
Tax Software Is Foolproof
Tax software is an excellent tool for most people, but it’s imperfect. The information you provide is what these programs rely on, and they won’t catch mistakes or missed deductions if you don’t know how to input them. For example, the software won’t automatically uncover your savings if you overlook charitable donations or medical expenses. It’s sometimes worth having a professional check your work.
Making Charitable Donations Always Reduces Your Tax Bill
Giving to charity is rewarding and comes with nice tax deductions, too, but not all your gifts will lower your taxes. You must contribute to qualified organizations and itemize your deductions to claim the deduction. There are limits, even then, to how much you can deduct depending on your income.
If You’re Good at Taxes, It Means Big Refunds
A hefty refund feels like winning the jackpot, but in essence, it’s little more than lending the government an interest-free loan for the whole year. If you get a large refund, that means too much money was taken out of your paycheck. By adjusting your withholding, you can keep more of your earnings during the year to invest, save, or spend on other priorities.
If You Are Self-Employed, You Can’t Claim Home Office Deductions
This myth gained traction after many started working remotely, but let’s clarify: Under current tax laws, generally, if you’re an employee receiving a W-2, you cannot deduct home office expenses. But you can claim this deduction if you’re self-employed or own a business. What’s important is that the space is used only for work. If your counter doubles as a breakfast bar, your kitchen counter doesn’t count.
Disclaimer –The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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