Tax time is just around the corner, and hopefully you have your W-2 and are getting ready to put your 2007 tax return behind you. As you review materials and get excited about refunds, rebates and deductions, don't fall for these common tax myths that will only lead to time-consuming research and perhaps a higher tax bill instead of a hefty return.
tax myth no. 1
I don’t have to pay taxes
According to the February 2008 CCH Complete Tax Survey, 23% surveyed said they did not have to file taxes or were unsure whether they had to or not. Every person in this country needs to file taxes, including students, children, people who make no money, and people who get paid only in cash. Returns for students and children are often lumped into the tax returns of their parents, but they must still file, regardless. You should never fall into the tax myth of not filing. Even if there are no immediate consequences, if one day you decide to file your own taxes or take a job where taxes are withheld, the IRS will quickly notice a gaping hole in your tax return history. Even if you owe no back-taxes, there are always fines, and the process of catching up will consume a great deal of your time. Don't fall victim to this tax myth and make sure that you file your tax return every year, regardless of your financial situation or social status.tax myth no. 2
My accountant is liable (for mistakes)
Many taxpayers assume that if they go to a professional firm, the accountant will be liable for any errors or omissions that may result in you having to pay more taxes, penalties or even endure an audit. The accountant may have made a mistake, but the responsibility to pay for it comes on your shoulders. First, never assume your accountant has everything under control. Computer accounting software today makes basic math errors less common, but you should always review your return and understand what is being submitted to the IRS before it goes out the door. Most importantly, be accountable for your own situation. Sometimes, a mistake by an account may not result in fines or an audit, but it can manifest itself in the form of a missed deduction or tax credit.tax myth no. 3
I don’t have any business expenses
Just because you're not a business owner, it doesn't mean you don't have valid business- or employment-related expenses you can deduct on your taxes. At your 9-to-5 job, ask yourself what things you're paying for in order to maintain employment. If you're a teacher, for example, you will often find yourself making extra school supply purchases for your students -- these are deductible. If you have a certain uniform for work, you may be able to deduct dry cleaning expenses. If you are becoming part of the growing segment of freelancers, consider incorporating yourself as a business. That step will cost you a few extra dollars in terms of state and legal fees, but you may become eligible for far more favorable tax treatment when it comes to health insurance premiums, travel and entertainment deductions, and even a retirement plan via a SEP IRA.tax myth no. 4
All of my home costs are tax deductible
One place where people tend to get into a lot of trouble on their taxes is on deducting home-related expenses. There are many benefits to owning a home, such as being able to deduct interest paid on the loan and some favorable tax treatment when you sell a home for a gain, but there are also many pitfalls. One of the most common downfalls of home ownership is the interest you pay on your home mortgage. Some tax payers believe that both the standard deduction and the interest paid count as deductions. To claim interest on a home purchase you must itemize your deductions, so you should review to see exactly how much interest was paid during the year. In some cases, it might be better to take the standard deduction, especially if you bought a home later in the year. Another item that has been a hot topic, especially in this lowered real estate market, is that you can take a tax loss if you sell the home for less than you paid for it. Homes are considered personal property and are not eligible for the special capital loss treatment. The IRS views selling your house for a loss no different than selling your $1,000 TV for to a buddy for $100 -- you don’t get to take a $900 deduction. You should also be careful about deducting basic home improvements or maintenance expenses. Those absolutely are not deductible. Finally, in some cases, if you make too much money you may not be eligible for certain deductions, like the PMI deduction if your adjusted gross income is above $110,000.tax myth no. 3
Only the rich get audited
You may feel that since you hardly make any money, the IRS really doesn't care to review your tax records. Although 2% of people making over $100,000 get audited versus less than 1% who make less than $25,000, audits are not random. The IRS uses sophisticated computer scoring methods to determine who gets audited and who does not -- and income is not one of the things they look for. If your tax return throws up enough red flags, you may very well get audited. In most cases, the IRS will simply ask you to correct or to provide a revised tax return rather than a full-blown audit. That is certainly a better punishment, but it can delay the processing of your tax refund, which is not much fun. When it comes to preparing your tax return, never assume you're out of the woods for an audit, even if you have received your tax return. In most cases, inquiries are solved by sending a brief letter or receipt -- if you have anything that might trigger a red flag, simply make sure you can back up your claim.tax time trivia
Death and taxes are the only certain things you will have to experience during life, or so they say. It's no fun to pay taxes, but it's less fun to pay them and then have to pay more or end up enduring an audit. While it seems like the tax laws are out to get you, in many ways they exist for your protection. When preparing your taxes it always makes sense to discuss with a trusted adviser or read up on the IRS tax laws yourself before proceeding with anything. The IRS is a big advocate of informing consumers of tax myths and schemes and posts answers to frequently asked questions about deductions. Be responsible, be accountable and always double check any tax-related rumors you hear. If it sounds too good to be true, it absolutely is.Resources:
http://www.completetax.com/
http://www.govtech.com/
www.mckenzielaw.com
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