Americans love myths. Some surveys have shown that 18% of them believe the Loch Ness monster is real. Also, 13.5% believe Bigfoot is out there somewhere. But myths like Bigfoot and Nessie routinely get shoved aside in America’s collective psyche during tax season, when the focus turns to myths of magical deductions, enchanted tax credits and alternate-universe math.
Unfortunately, even the best tax software can’t protect you from every mistruth on taxes. Here are seven of the most common tax myths — and a hard dose of reality from tax pros who know better.
Myth No. 1: Getting an extension from the IRS means you have more time to pay your tax bill.
Reality: An extension only gives you more time to send a tax return to the IRS. You still have to pay your tax bill by April 18 this year. Pay late, and you’ll likely rack up interest and penalties. If you have no idea what you owe, a federal tax calculator can help estimate your burden.
Even if you don’t have the cash to pay your taxes by April 18, be sure to file your extension on time, says Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants.
“There are two penalties: one for failure to file and one for failure to pay,” warns Weston. “The one for failure to file is 10 times higher per month than the one for failure to pay. You don’t want that one.”
Myth No. 2: You don’t have to report income that was paid in cash, that was a small amount or that didn’t come with a record.
Reality: Think again. Unless the IRS explicitly says otherwise, income from almost all sources is taxable income, Weston says.
Much of your income may appear on a W-2 or 1099, which are records you receive from employers, clients and other entities that show what you received during the tax year. You use those forms to report your income on your tax return. Here’s the rub – if you made money or received any kind of compensation but didn’t get one of those forms, you still have to report the income, Weston says.
“If you don’t get a W-2 or 1099, you should call [the payer] and inquire about one,” she says. If they don’t get you one, then the IRS has processes in place for you to estimate. They still want you to include that income.”
Myth No. 3: Overtime, raises and bonuses aren’t worth it because they’ll cost more in taxes than you’ll make.
Reality: Wrong, says John Warren, an enrolled agent at Medford Tax Experts Inc. in Medford, Massachusetts.
The United States has a progressive tax system, which means the government divides your taxable income into chunks based on federal tax brackets, and each chunk gets taxed at a different rate.
Even if extra money bumped you into a higher tax bracket, only a portion of your income would be taxed at that higher rate — the rest is taxed at lower rates. Your tax bracket is not the rate you pay on all your taxable income. In other words, take the money.
Myth No. 4: You can take the home-office deduction because you deal with people from work at night and on weekends.
Reality: Nope. “If you already have a dedicated office that your company has provided, you don’t get to also take a home office deduction,” Weston says.
“If you’re self-employed, or even if you’re an employee and your primary work space is your office, then you should deduct your home office,” she says.
You don’t have to own your house to take the deduction, Weston adds — renters can also take the deduction if they qualify. See IRS publication 587 for all of the details on the home office deduction.
Myth No. 5: Donations to a good cause are always deductible.
Reality: “That is absolutely not correct,” Weston says. Only contributions to organizations specifically recognized by the IRS are tax-deductible. A contribution to a specific individual also isn’t deductible, according to the IRS.
“That means if you have a neighbor whose house has burned down and you help put them up in a hotel for a week, or you buy them a new bedding set or something like that — that is very charitable of you; that is a very decent, kind thing of you to do. But it is not a tax-deductible thing,” she says.
Online campaigns to help specific people in a jam are also usually not deductible, she adds.
“Those things are incredibly popular right now, and I’m sure a lot of people think that’s a charitable contribution,” she says.
Myth No. 6: Social Security isn’t taxable.
Reality: “People confuse the Social Security rules with the income tax rules,” Warren notes. According to the IRS, about 40% of people who get Social Security have to pay income taxes on their benefits. Generally, Social Security benefits paid to you can be taxable if you also have other substantial income (such as wages, business income, interest or dividends).
That means money from things such as retirement accounts and even part-time jobs can have unintended tax consequences for retirees.
“Anyone who collects Social Security or is thinking about retiring has to sit down and do tax planning,” Warren cautions.
Myth No. 7: Putting advertisements on your car makes your car deductible.
Reality: “This is an oldie but a goodie,” Weston says. “I still hear people say, ‘I put stickers, I put a — whatever — on my car, so it’s deductible.’ That’s not the case.”
The costs of having your business’s logo painted on your car can indeed be a deductible business expense if you’re self-employed, she notes. But even the mileage or expenses attributable to driving that car back and forth to the grocery store or shuttling the kids around is usually not. “If you use it for personal use, that part isn’t deductible,” she says.
Have you debunked any other tax myths? Let us know in the comment section.
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