Tax law is complicated, and there are a lot of myths floating around out there. Listening to your father-in-law’s tax advice based on something he heard from his golf buddy probably isn’t the best idea. Forbes.com published an article debunking the following 11 tax myths:
- You can’t take advantage of tax deduction unless you itemize. Although many deductions do require itemization, not all do. Federal form 1040 contains several of these deductions in the Adjusted Gross Income section. These deductions include the tuition and fees deduction, alimony and moving expenses.
- You don’t have to claim extra income so long as the total is under $600. Or under $300 or some other magical amount. All income must be reported, even if the income is just $1.
- Head of Household status applies to anyone with kids. You can only file as Head of Household (HOH) if you are unmarried and provide a home for a dependent. You must either be single, divorced, or meet all of the following criteria:
- You must have lived apart from your spouse for the last 6 months of the tax year.
- You must file a separate tax return from your spouse.
- You must have paid over half the cost of keeping up your home for the tax year.
- Your home has to have been the main home of your child, stepchild, or foster child for more than half of the tax year.
- You can or could claim (under the rules for children of divorced or separated parents) this child as your dependent.
- You don’t have to worry about an audit if you make it 3 years without filing a return. This myth originated from the statute of limitations. The time that the IRS has to examine your tax return is three years after either the date you filed or the due date of your tax return. However, if you fail to file a return, the statute of limitations never begins. So the IRS can (and will) hold you accountable if they become aware of your failure to file.
- You are not responsible for mistakes on your return made by your tax professional. Although tax professionals should make every effort to be accurate, they do occasionally make mistakes, and the IRS ultimately holds the taxpayer responsible for his or her own return.
- Fixing a mistake on a tax return will result in an audit. Actually, the opposite is true. If your return contains mistakes it’s more likely to trigger an audit than if you file an amended return.
- After the age of 55, you can sell your house tax-free. This myth was true in 1996, but the law changed under President Clinton. Today, you can exclude up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of a personal primary residence if you’ve lived in it for two of the last five years.
- Minors don’t have to file and pay taxes. The rules regarding minors’ responsibility for taxes differentiate between earned income (income from wages, salary or self-employment) or unearned income (generally passive income like money earned from dividends and interest). The rules vary according to the specific situation.
- Getting the biggest tax refund possible is the best possible result at tax time. Unless you like the government earning interest on your money, this idea is false. With just a little planning, you could be earning that interest instead.
- Employer-provided health insurance is taxable. Although there will be a penalty for taxpayers who are not covered by health insurance under the new healthcare plan, you will not be required to pay taxes on it. The exception is the so-called Cadillac tax on high-dollar insurance plans (effective in 2018).
- Receipt of a refund means the IRS agreed with my tax return. If the IRS sends you a refund, that means only that they sent money you said you were owed. If, upon later examination, the IRS finds inaccuracies in your return, you will still be held responsible for them.