It never fails. As the tax deadline draws closer, the amount of bad tax advice being shared seems to multiply. Add in a pandemic and a plethora of new tax relief changes, and it gets even more confusing. To help you differentiate between truth and tax fiction, we’ve put together a list of the 10 most common tax myths currently making the rounds.
1. A Tax Extension Allows You to File and Pay Later.
Wrong! A tax extension gives you more time to file your taxes, not pay them. If you owe taxes, you should still submit your payment by the regular tax filing deadline to ensure you don’t get hit with penalties and interest. Not sure how to file a tax extension? Check out our quick and easy video!
2. If You Work From Home You Can Claim The Home Office Deduction.
Maybe. Due to COVID-19, many of us are working from home, but that doesn’t make you automatically eligible for the home office deduction. To claim it, the following must be true:
- You are self-employed or a business owner.
- You regularly use part of your home exclusively for business.
- Your home is your principal place of business.
Rumors about a coronavirus waiver for this deduction can be added to the long list of tax myths. If you’re an employee and working remotely due to the pandemic, you won’t qualify for the home office deduction.
3. You Won’t Pay Taxes on Social Security Income.
Possibly. You may have to pay taxes on some of your Social Security income if you have other income in addition to your benefits. Per the IRS, if you:
- file as an individual – single, head of household, or widow(er) – and your combined income is between $25,000 and $34,000, you may pay income tax on up to 50% of your benefits. If it’s more than $34,000, up to 85% of your benefits could be taxable.
- file a joint return and your combined income (you and your spouse) is between $32,000 and $44,000, you may pay income tax on up to 50% of your benefits. If it’s more than $44,000, up to 85% could be taxable.
- file under married filing separately status, you will most likely pay taxes on your Social Security benefits.
Your combined income is calculated by adding any nontaxable interest and 50% of your Social Security benefits to your adjusted gross income. If Social Security is your only source of income, however, you will not owe taxes on your benefits.
4. You Don’t Have to File Taxes If You Don’t Receive a W-2 or 1099.
Incorrect! If you are paid in cash, cryptocurrency, or goods, you are still required to file a tax return if you earn $400 or more. You may also need to pay self-employment taxes. To learn more, check out our blog post, Tax Tips for Independent Contractor Work.
5. You Can Choose Your Filing Status.
Yes and no. The IRS has five filing statuses: single, head of household, qualifying widow(er), married filing jointly, and married filing separately. In most cases, the choice is easy. There are life events, however, that may complicate things. For example, if you get married anytime during the tax year, even if it’s on December 31, you cannot file as an individual. And if you are not married on December 31, due to a legal separation or divorce, you cannot file as a married person, even if you were married 364 days of the year. If your spouse dies, it can get even more complicated, especially if you remarry before the end of the tax year. If you are married, however, you can choose between married filing jointly or married filing separately status, depending on which gives you better tax advantages. When in doubt, always consult with a tax professional to ensure you select the correct filing status.
6. When Your Stocks Lose Money You Can Claim a Loss.
Nope. Nobody enjoys seeing their stock values plummet. Unfortunately, unless you sell or transfer those stocks at a loss, you won’t be able to claim your misfortune on your tax return. Unrealized gains and losses carry no tax benefits or consequences.
7. If You Use a CPA, They Are Responsible For Errors on Your Return.
Wrong. Even if you pay someone to complete your tax return, you are liable for all errors it may contain. Always double-check your forms before signing and filing them. To reduce your risk of getting into trouble with the IRS, review their tips for hiring a reputable tax preparer.
8. You Won’t Owe Taxes If You’re Paid in Cryptocurrency.
Incorrect. The IRS is cracking down on those who dabble in cryptocurrency. If you are paid for services rendered or in trade for tangible goods, you must claim it as income and pay taxes. To learn more, be sure to check out our Ultimate Cryptocurrency Tax Guide!
9. If Your Spouse Doesn’t Work, They Can Be Claimed as a Dependent.
False. Even if your spouse sometimes acts like a child, they cannot be claimed as a dependent regardless of their employment status. As far as tax myths go, this one never fails to amuse us.
10. Filing a Tax Return is Voluntary.
Not really. Although the IRS classifies ours as a “voluntary” tax system that doesn’t mean that filing a return is voluntary. It simply means that you get to complete and submit your tax return instead of the government doing it for you. If you owe taxes and don’t file, however, the IRS may file a substitute for return (SFR) on your behalf. This will not include any credits or deductions you may be due and could result in a higher tax liability.
Don’t believe all the tax myths you hear. For the truth about taxes, call Tax Defense Network at 855-476-6920 for a free consultation. We can help with unfiled tax returns, back taxes, and more. If you have tax questions, we have the answers!