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5 Tax Filing Myths

Tax season is here again and with it comes a whole host of false information floating around on the internet. Not all of us are tax experts so it’s easy to believe tax myths when you hear them. Next Step Financial knows our way around taxes and we want to make sure you’re prepared, so here’s the truth about five tax filing myths:

1. Not everyone has to file taxes

This may seem obvious to some people, but hundreds of people fall for this one every year. This myth stems from a line on Form 1040 that reads “our system of taxation is based upon voluntary assessment and payment, not upon distraint.” False social media posts will claim that means that our tax system is voluntary – this is not true. This line refers to the fact that in the United States we have the opportunity to file our own taxes or have the government file them for you. Paying taxes is not voluntary.

People who don’t have to file taxes:

Children i.e. people under the age of 18. The age of 26 only refers to the age that medical insurance coverage can be extended, your parents can not claim you as a dependent after the age of 18 unless you are a student.

If you are a student below the age of 24, your parents can claim you as a dependent but only if you make under $12,000 a year.Retired individuals whose only income is Social Security, do not need to file an income tax return.

For tax year 2019, you will need to file a return if your income is $13,850 or more. However, if you live on Social Security benefits, you don’t include this in your income. If this is the only income you receive, then your gross income equals zero, and you don’t have to file a federal income tax return. But if you do earn other income that is not tax-exempt, then each year you must determine whether the total exceeds $13,850.

2. Your Accountant is responsible for mistakes made on your taxes

If your tax preparer messes something up on your returns, it will result in an audit for you. They may be able to help you with your audit but it’s entirely on you. The best way to ensure that this doesn’t happen is to do your research on your accountant or tax preparer and double-check their work before submitting your return. Some more reputable return preparers are willing to stand by their mistakes on audit so make sure to ask about their audit policy.

3. Money made online or at a side job is not taxable

You may have heard the joke that “even your kid’s lemonade stand is taxable according to the IRS” and while that’s not necessarily true, it’s easy to think that if you didn’t receive a W-2 then it’s not worth reporting. Side jobs, online income, freelance projects, and basically any way that you made money in the last year needs to be reported. And with the multiple ways that people earn income online these days it’s easy to lose track of an income source. That’s why it’s important for freelancers to keep track of their income throughout the year. Even criminal activity needs to be reported to the IRS as income, just ask Al Capone. Being paid “under the table” may sound fine but you can potentially miss out on valuable Tax Credits such as the Earned Income Tax Credit and Social Security Benefits later on in life since they’re based on your earnings history with the IRS.

4. You can file your pets as dependents

Trust us, we understand the desire on this one – pets are expensive and they’re basically like our children right? Well the IRS doesn’t see it this way. The only way that Spike can help you with your taxes is if they’re a service dog. In that case, you can deduct expenses from training, purchasing, vet care, and food.

5. Filing an extension will get you audited

Asking the IRS for more time to make sure that everything is in order is actually not one of the red flags for them. The only thing that filing an extension will do is get you more time to make sure that you file correctly. What will get you audited though? Here are a few red flags the IRS DOES pay attention to:

Not reporting all of your income. This is the easiest to avoid and the easiest to overlook red flag. It might seem like no big deal to leave off the $12 you made that one day at work before you quit, but the IRS receives a report from every institution that distributes income and if your return doesn’t match the report that’s an easy way to set off an audit letter.

Breaking the rules on foreign accounts or having a foreign account in general. This one is a bit of a catch-22 due to the Foreign Account Tax Compliance Act. The act requires foreign banks to identify American account holders and report it to the IRS. Individuals must also report any foreign assets worth over $50,000. The regulations demand openness, which in turn increases the likelihood of an audit because of a perception that taxpayers with foreign accounts are trying to hide income offshore. Compliance with the law increases the likelihood of an audit, and noncompliance can result in fines and legal ramifications.

Making over $200,000. According to the IRS, last year they audited about 1% of those making less than $200,000 a year and almost 4% of those making more. For those that made $1 million, that number increases to 12%. The same patterns exist for businesses with 1% of corporations with less than $10 million in assets being audited, compared with 17.6% for those above that threshold.

Blurring the lines on business expenses. The IRS will take a close look at any business expenses that exceed the norm. For instance, deducting business meals is one thing but deducting thousands of dollars in business meals will likely get you audited.

In terms of home office deductions, the IRS has outlined two criteria before you can start deductions:

      • Regular and Exclusive use
      • Principal place of your business.

This means using a section of your house exclusively for your business and not having a secondary location you use for in-person meetings.

Are you ready to take the next step for your financial plan? Schedule a FREE consultation with me to learn how you can optimize your budget by clicking HERE.

 

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