Common Tax Myths

As tax year continues, misinformation can spread quickly, leading many to make mistakes on their returns. Here’s a detailed look at some of the most common tax myths, debunked to help you navigate the tax landscape with confidence.

“You Don’t Need to File if You Didn’t Earn Much Money”

Many people think that if their income falls below a certain threshold, filing a tax return isn’t necessary. However, this isn’t always true. While there are income limits that determine whether you’re required to file, even low-income earners may need to file to claim certain tax credits, like the Earned Income Tax Credit (EITC) or the Child Tax Credit. Filing can also allow you to receive a refund if taxes were withheld from your paycheck. For more information on which tax bracket you qualify for, you can visit the IRS website’s Federal Income Tax Rates and Brackets page.

“You Can’t Get a Refund if You Owe Taxes”

Some taxpayers believe that owing money means they cannot receive a refund for other credits. In reality, you may still get a refund for refundable credits, which can offset any tax owed. For example, if you qualify for the EITC and owe taxes, your refund may exceed what you owe, giving you extra money back.

“Only the Wealthy Get Audited”

It’s a common misconception that only high-income individuals face audits. The truth is, anyone can be audited, regardless of income. The IRS uses various criteria to select returns for review, including discrepancies, unusual deductions, and random selection. Even if you earn a modest income, you should keep thorough records and file accurately to minimize the risk of an audit.

“All Your Income is Taxable”

Some taxpayers assume that every dollar they earn is taxable. However, certain types of income are not subject to taxation. For instance, gifts up to a certain amount, inheritances, and some scholarships can be tax-exempt. Knowing which sources of income are taxable and which are not can help you plan more effectively and avoid unexpected tax bills. In addition, it is also important to note that different portions of your income are taxed at different rates. Generally, the more taxable income you have, the higher the tax rate.

“Tax Deductions and Credits are the Same”

Understanding the difference between tax deductions and credits is crucial. Deductions reduce your taxable income, which lowers the amount of tax you owe. For example, if you have $50,000 in income and $10,000 in deductions, you’re taxed on $40,000. On the other hand, tax credits directly reduce your tax liability. For instance, a $1,000 tax credit reduces your tax bill by $1,000. Knowing how to maximize both can significantly impact your overall tax bill.

“You Can Deduct All Business Expenses”

While many business-related expenses are deductible, not every expense qualifies. The IRS specifies that only ordinary and necessary expenses for your business can be deducted. This means you can deduct expenses like office supplies, travel related to business, and some meals. However, personal expenses or lavish expenditures that aren’t directly tied to your business operations won’t qualify. Keeping detailed records of your expenses is essential for substantiating your deductions.

“Pets Can Be Claimed as Dependents”

Pets are cherished members of many families, but unfortunately they cannot be claimed as dependents on your tax return. The IRS has specific criteria for dependents, including age and relationship. To qualify as a dependent, the individual must be a child or relative living with you, or a qualifying child under certain age limits. Understanding these rules is crucial to accurately filing your taxes.

“Tax Refunds are Free Money”

Many people think of tax refunds as extra cash from the government, but in reality, a refund is a return of your own overpaid taxes. If you receive a large refund, it means you’ve had more money withheld from your paycheck than necessary throughout the year. This can be seen as an interest-free loan to the government. Instead of overpaying and waiting for a refund, some people prefer to adjust their withholdings so they can keep more money in their paycheck throughout the year.

Summary

Understanding these common tax myths can empower you to make better financial decisions and avoid pitfalls when filing your taxes. Staying informed will help ensure your return is accurate and maximizes your potential benefits. If you have questions or uncertainties, consulting a tax professional can provide personalized advice tailored to your unique situation.

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Kayla M. Pham / admin@rataxandaccounting.com

Administrator

RA Tax & Accounting