11 Lies You’ve Been Told About Paying Taxes
What would you do to get out of paying taxes? Thirty-two percent of Americans dread filing so much they would happily perform multiple karaoke songs in front of all their co-workers to avoid filling out their Form 1040. Eighteen percent would go without Wi-Fi for an entire year, and 13% would gain 20 pounds if it meant not having to pay the IRS, a GoBankingRates survey of 1,000 people found.
Anger, fear, and frustration over paying taxes are normal, but many Americans are getting themselves worked up over nothing. Taxes are a big deal, and you have to pay them, but they’re not as scary as you think. What is frightening, though? Believing common tax myths. Swallowing these lies can lead to costly filing mistakes. You might miss deductions or credits, lose out on refund money, or even face fees and penalties. Fortunately, a little education goes a long way when it comes to avoiding common tax mistakes.
“As you’re preparing your taxes, make sure you’re doing your research,” Bethy Hardeman, chief consumer advocate at Credit Karma, told The Cheat Sheet. For example, taxpayers who believe their income is too low to file won’t be able to claim the Earned Income Tax Credit. “Missing out on this credit can be significant. The average Earned Income Tax Credit was nearly $2,500 last year, according to the IRS,” Hardeman said.
To keep you from getting caught in a sticky tax trap, we’ve put together this list of 11 common lies you hear about paying taxes. Read on to discover how to separate the truth about taxes from the myths.
1. The deadline to file is always April 15
Ask people what day their taxes are due, and most would promptly tell you April 15. And they’d be wrong — at least this year. Although Tax Day is usually April 15, some years — including 2017 — you get a few extra days to file because the deadline falls on a weekend or shifts due to a D.C. holiday.
“The deadline to file your tax return without filing an extension is Tuesday, April 18, this year,” Andrew Oswalt, a CPA and tax analyst with TaxAct, told The Cheat Sheet. “That’s because the 15th falls on a Saturday, and Emancipation Day, the anniversary of the abolition of slavery in the District of Columbia, is recognized on Monday, April 17, 2017, and is a holiday in D.C. For tax-filing purposes, the IRS treats this day as a federal holiday.”
2. Getting an extension gives you more time to pay
If you know you’re going to blow the April 18 tax filing deadline this year, you can ask the IRS for an extension by completing Form 4868. You’ll get an extra six months to gather all your paperwork and file your forms, which is good news for the slackers among us. But there’s a catch.
“Filing an extension does not provide extra time to pay,” Owalt said. “Filing an extension buys you extra time to get your paperwork to the IRS. However, any tax you owe is still due by April 18, 2017.” If the IRS will be sending you a refund, you’re in the clear. However, if you owe money, the IRS could hit you with a penalty of 25% of your unpaid balance.
3. If you’re in the 25% tax bracket, the government takes 25% of your income
Your tax bracket and your tax rate aren’t the same thing, though it’s easy to see why some people confuse them.
“Our tax system is set up in tax brackets, which means the tax you pay increases with your income,” Hardeman said. “Being in the ‘25% tax bracket’ doesn’t mean that you’re paying 25% of all your income. When people say they’re in the 25% tax bracket, they’re usually referring to their marginal tax rate, or the tax rate paid on any extra dollar of income earned.”
What does that mean for your money? If you’re single and earn $70,000 a year, you’re in the 25% tax bracket. You pay 10% on the first $9,275 in taxable income, 15% on the income between $9,275 and $37,650, and 25% on any taxable income above $37,650 (up to $91,150). Your effective tax rate would be about 19%, not 25%.
4. Getting a big refund is always good thing
Getting a fat refund check from the IRS might be nice, but don’t get the idea that it’s a gift from the government. “It’s important to know that a tax refund isn’t free money,” Hardeman said. “Getting a large refund might mean you’ve been paying too much tax throughout the year.”
If you’re getting a hefty check from the IRS, you might want to adjust your withholdings, so you have it to spend (or save) throughout the year rather than waiting until tax time rolls around, especially because the IRS doesn’t pay you interest on the money you’ve “loaned” it.
Still, some people, especially those who need some extra help setting aside cash, like those fat refund checks. “If you might be tempted to overspend, having the money returned later through a refund could be a good way to ‘force’ yourself to save,” Hardeman said.
5. You don’t have to report your income from a side job
The IRS wants to know about all the money you earned last year, whether it was from a salaried job or cash you earned for babysitting.
“It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income,” according to the IRS. However, if your profit doesn’t exceed $400 a year, you don’t need to fill out Schedule C or Schedule C-EZ. You also need to report the fair market value of prizes you won or goods or services you bartered or exchanged.
6. College students don’t have to file taxes
Mom and dad might be footing the tuition bill, but if Junior is earning money of his own, there’s a good chance he has to file taxes. Full-time students whose parents are still claiming them as dependents must file if they earned more than $6,300 from a job last year or had more than $1,050 in unearned income. Don’t meet those thresholds? Your college-age son or daughter might still want to complete a Form 1040.
“Even if you don’t have to file a federal income tax return, you should file if you can get money back (for example, you had federal income tax withheld from your pay or you qualify for a refundable tax credit),” according to the IRS.
7. Taxes are too confusing for the average person to understand
The U.S. tax code covers a staggering 75,000 pages and is ridiculously complex by most measures. But for many filers, things aren’t nearly so complicated. Assuming your situation is fairly straightforward and you can read and follow directions, you can probably do your taxes yourself.
“Because taxes are complex and may change, people often believe taxes are more challenging than they really are. Many Americans can actually do their own taxes, especially if they only have wages from an employer or basic investments,” Hardeman explained, adding that free online tools, such as Credit Karma Tax, can help people figure out what information they need and walk them through the filing process.
8. You can’t file until you have your 1095 Form
Under the Affordable Care Act, you’re required to have health insurance or pay a fine. If you’re like most Americans and get coverage through your employer or from a government program, such as Medicare, you’ll receive a 1095-B or 1095-C to prove you had insurance. But in most cases, you don’t actually need that form to file (though you will want to keep it for your records).
“Many filers year think they need to wait for Forms 1095-B and 1095-C, which are health insurance tax forms, before they can file their return, but that’s not true,” Oswalt said. “If you had full-year health insurance coverage, no action needs to be taken with your Form 1095-B or Form 1095-C. If you did not have full-year coverage, you can use the information on Form 1095-B or Form 1095-C to report the number of months you did have coverage.”
Getting coverage through a marketplace exchange complicates things. In that case, you’ll receive a 1095-A form, and you will need it to figure out your premium tax credits.
9. You’re not responsible for your spouse’s tax trouble
So you’re married to a cheater — a tax cheater, that is. You might be ignorant of your spouse’s fiscal shenanigans, but the IRS doesn’t necessarily see it that way. If you file jointly, you can later be held responsible for your partner’s misdeeds, even if you weren’t the one padding deductions or hiding income. The IRS might even come after you for money after a divorce for mistakes that happened when you were still married. If that’s not a good argument for being fully informed about your family’s finances, we don’t know what is.
The IRS does make exceptions for “innocent spouses” who can prove they had no way of knowing the funny business their husband or wife was pulling with their tax return. The rule offers some protection to abused spouses and others who couldn’t have known about or prevented the tax problems. But you’ll still need to make your case to the IRS.
10. Big medical expenses equal a big tax break
There’s little reason to cheer a big medical bill. But at least you can deduct the money you handed over to the hospital from your taxes, right? Not so fast, say tax experts. While you can deduct medical expenses, doing so might not yield the tax savings you’re dreaming of.
“Just because you enter medical expenses on your tax return does not mean you are getting a nice tax break,” Oswalt said. First, your expenses need to exceed 10% of your adjusted gross income, a pretty high bar for some people to meet. (The threshold is 7.5% is you’re over 65.) Plus, you have to itemize to get the deduction, which doesn’t make sense for all filers.
“If the total of your itemized deductions do not exceed your standard deduction, you again do not receive any tax benefit from your medical expenses,” Oswalt explained.
11. Audits are inevitable
Twenty-five percent of Americans worry about an audit. But the actual chances of being subject to extra IRS scrutiny are slim. About 1% of all taxpayers had their returns audited in 2015. Audit risks are higher for certain groups, such as the self-employed and those earning more than $200,000 a year. But even then the share of filers required to go over their return with an examiner is fairly small.