Tax season is upon us and lately I have been hearing many misconceptions about taxes so I thought we could talk about some of them in this blog. Here are seven income tax myths and the realities behind them. Which have you always believed to be true?
Myth: You’ll receive a bigger refund if you hire someone to prepare your taxes.
Hiring a tax professional to prepare your taxes does not guarantee you will receive a bigger refund. In fact, if the preparer promises a guaranteed refund or an inflated refund, you should take your documents and run in the other direction. Likewise, if the preparer’s fee is based on the size of your refund, you might want to consider another preparer. Here are some tips on choosing a professional and reputable tax preparer.
On the other hand, if your tax situation is complex and/or you have a business, a tax professional will help you utilize all of the tax deductions and benefits that are legally available to you, which could result in a higher refund or lower taxes.
Myth: Filing a tax return is voluntary.
If you have taxable income, you are required by law to file an income tax return. For folks who are interested, this is Title 26 of the U.S. Code which was ratified by the 16th Amendment to the Constitution.
Myth: Students don’t have to file a tax return.
Whether you are a student or not has no bearing on your responsibility to file a tax return. Anyone who has more than $400 in self-employment net income or more than $12,000 in gross income is required to file a tax return. Students who have less income may still want to file if they had income taxes withheld and are due a refund.
Myth: Filing an extension gives you more time to pay any taxes that are due.
Filing an extension gives you extra time to gather your information and file your tax return. It does not give you extra time to pay the taxes you owe.
Myth: You don’t have to pay taxes on illegal income.
The IRS doesn’t care whether your income is from a legitimate activity or an illicit one. If you have taxable income, you are legally obligated to file a tax return and pay your taxes. If you don’t believe that, read up on what put Al Capone in prison.
Myth: You don’t have to pay taxes on restaurant tips.
Federal law requires any tips greater than $20 in any month must be reported to the employer. If the employer doesn’t report the tip income, the employee recipient of the tips is required to file Form 4070 or Form 4137 (for unreported tip income).
Myth: Social Security benefits are not taxed.
In many states, Social Security benefits are tax-free for state income tax. For federal tax purposes, the taxation of Social Security benefits is dependent on how much other income is on the tax return. If other income (including tax-free income) plus 50% of Social Security benefits is less than $32,000 for a married couple ($25,000 for others), a portion (up to 85%) of Social Security benefits will be subject to federal income tax.
Did you believe any of these myths to be true? Knowing what is fact and what is fiction when it comes to filing taxes could save you time, money, and a lot of hassle. Have more questions about filing your taxes this year? Please reach out, I’d love to help!Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.