Don't Believe These 12 Common Tax Myths

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To say the U.S. tax system is confusing is an understatement, so it's no wonder there are many misconceptions about the rules. The good news is that most people make less than $100,000 in a year and have no income other than their paychecks, so they can fill out the comparatively brief and very direct short form; almost everyone who uses the 1040EZ can fill it out themselves. For everybody else, though, the baffling mysteries of the tax code prevail, and can ultimately cost money. To help unravel some of the perplexities of the system, here are 12 common tax myths debunked. It might save money and sanity when the deadline rolls around.

MYTH: FILING A TAX RETURN IS VOLUNTARY

No, it isn't. It's mandatory, although compliance is voluntary -- only because the Internal Revenue Service can't follow everybody in the country around to make sure they file. There is, in fact, a law (Title 26 of the U.S. Code, ratified by the 16th Amendment to the Constitution) that requires every individual with taxable income to file. While some people make too little to file, in general everybody with an income is expected to send in a return.

MYTH: STUDENTS DON'T HAVE TO FILE A TAX RETURN

Maybe true, maybe not. The IRS cares not about the educational status of citizens but about their income. If students have more than $10,300 in income or $400 in self-employment income, they need to file. Even if working students earn less than the filing minimum, it's a good idea to file, because a refund may be due.

MYTH: HAVING A DESK WHERE WORK IS DONE MEANS A HOME OFFICE DEDUCTION

People who work at home can claim the part of their home in which they work as a deduction, that's true. But people who work in an office during the day and sometimes bring work home do not have a home office, according to the IRS, even if they have a dedicated place at home from which to work. The home office deduction applies only if the home is the principal place of business, which means the taxpayer must be self-employed.

MYTH: CLAIMING A HOME OFFICE IS AN AUTOMATIC AUDIT

Nope. There is no such thing as an automatic audit. There's no way to game the system to avoid one, either. Fraudulently claiming a home office, very high self-employment income, or taking more business deductions than income from self-employment are red flags, though. And there are a few scenarios that might trigger an audit: major changes in income or charitable giving, missing forms or files or numbers that don't add up, claiming business expenses for a hobby, and having an overseas bank account or foreign assets. The best way to avoid an audit is to be careful and honest about deductions.

MYTH: LOW-INCOME FILERS DON'T GET AUDITED

The IRS is looking for discrepancies, not income. So an audit could happen no matter how low a filer's income. One out of every 119 returns gets audited, according to Kiplinger. But it is true that the higher the income, the greater the possibility of an audit, usually because the returns are more complicated. For people with incomes of more than $200,000, the chance of an audit is one in 37.

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MYTH: MARRIED PEOPLE MUST FILE A JOINT RETURN

It is often a good idea for married people to file jointly, but there's no rule that says they must. Filing jointly means a bonus if there is a big disparity in income, or if joint income is less than about $150,000, according to the Tax Foundation. Once taxpayers get above that income level, there is actually a penalty for filing jointly, because they get pushed into another tax bracket. In that case, it makes sense to file separately. This also applies if both spouses have equal but fairly low incomes, because if they remained unmarried one could claim head of household status, and that gets lost after the wedding.

MYTH: THERE IS NO GOOD REASON TO E-FILE

E-filing will probably be mandatory pretty soon, but there are still some technophobes who believe e-filing is somehow not as effective or as safe as mailing in a paper return. According to H&R Block, it is safer to file electronically because there is less susceptibility to human error from having an IRS employee re-enter tax information into the system. Refunds are deposited more quickly, and it's possible to have funds withdrawn directly from a bank account when money is owed -- no check-writing needed.

MYTH: FILING AN EXTENSION MEANS DELAYED PAYMENTS

If taxpayers owe money to the government, the filing deadline is April 18 this year or there will be potentially quite costly interest and penalties. The failure-to-pay penalty is half of 1 percent of the money owed, which applies each month starting April 19. There is no stigma attached to filing for an extension -- the government does not ask for a reason, just the proper filing and at least 90 percent of the money owed. Of course, when the full return is filed, anything still owed to the government must be paid.

MYTH: RESTAURANT TIPS DON'T COUNT AS INCOME

Ah, if only this were so. But it's not. Federal tax laws require that any tips over $20 in any given month should be reported to the employer, which includes tips from customers as well as any pooled tips. If the employer doesn't report tip income for workers, it's important to keep track of tips independently and file Form 4070 (or Form 4137 for unreported tip income). If part of the tips received are pooled, the person getting the tip needs to report only the part that was kept.

MYTH: RETIRED PEOPLE DON'T HAVE TO PAY TAXES

As usual, the IRS doesn't care about working status, just about income. But the cutoff for having to file is somewhat higher for people over 65 than for younger people. For single seniors, the cutoff is $11,850; if both spouses are 65 or older and filing jointly, the cutoff rises to $23,000.

MYTH: NO TAXES ARE OWED ON MONEY LOST IN THE STOCK MARKET

Investors who lose a lot of money might figure they can deduct those losses against their income and not have to pay anything. Well, maybe. First of all, to take any deduction at all, the stocks have to be sold, making them a capital loss. And while it is possible to deduct capital losses, $3,000 is the maximum. That's usually not enough to cancel out other taxes. Capital losses over $3,000 per year can be carried over to other years, though, and deducted against either capital gains or income.
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MYTH: WITHHOLDING AS MUCH AS POSSIBLE FROM PAYCHECKS MAXIMIZES REFUNDS

Technically this is true, insofar as the more that's withheld from the weekly paycheck, the more is likely to be refunded in April. But it's not a sensible strategy. People who do this on purpose are giving the government an interest-free loan and missing out on the chance to spend their own money or earn interest on it. A much better idea would be to put the money in an interest-bearing account, even if the interest is only 1 percent. That way, if it turns out the government is owed money in April, you have still made something.