Tax season can be a confusing and overwhelming time, and unfortunately there are many myths and misconceptions about taxes that can make the process even more difficult.
Myth: You don’t have to file taxes if you don’t owe any money.
Fact: Even if you (somehow) don’t owe any money, you are likely still required to file a tax return. The filing requirements depend on your income, filing status, and other factors, so it’s important to check the IRS guidelines or consult with a tax professional to determine whether you need to file a return.
Myth: You can deduct all of your charitable donations.
Fact: While charitable donations can be deductible on your tax return, there are limits and restrictions on how much you can deduct. For example, you must itemize your deductions instead of taking the standard deduction, and you can only deduct donations to qualified organizations. Additionally, there are limits on how much you can deduct based on your income. Be sure to track your generosity throughout the year. And the above-the-line deduction for charitable contributions of up to $300 was eliminated in the most recent tax code update, which will affect returns for the first time this year.
Myth: You can deduct all of your home office expenses.
Fact: While some home office expenses may be deductible, not all of them are. To qualify for the home office deduction, your home office must be used regularly and exclusively for business purposes. Additionally, there are limits on how much you can deduct based on the size of your home office and your income.
Myth: You can deduct all of your business meals and entertainment expenses.
Fact: While some business meals and entertainment expenses may be deductible, not all of them are. To qualify for the deduction, the expenses must be directly related to your business or be associated with a specific business transaction. Additionally, there are limits on how much you can deduct, and some expenses may not be deductible at all.
Myth: You can’t file your taxes for free.
Fact: There are tons of free filing options. If you made $73,000 or less in 2022, you can use an IRS Free File provider to file taxes at no cost, and if you make $60,000 or less you can even get free in-person help through IRS programs.
Myth: Filing an extension means you don’t have to pay your taxes on time.
Fact: Filing an extension gives you more time to file your tax return, but it doesn’t give you more time to pay your taxes. If you owe taxes, you still need to pay them by the original filing deadline (usually April 15, but this year it is April 18) to avoid penalties and interest.
Myth: You can avoid paying taxes by using tax loopholes or offshore accounts.
Fact: While it is true that some tax strategies may allow for tax savings, it’s important to remember that there are strict rules and regulations around these strategies. Attempting to use these strategies in ways that are not permitted by law can result in serious consequences, including penalties and even criminal charges.
Myth: Students don’t have to pay taxes.
Fact: You have to file taxes based on your income regardless of your status as a student. An unmarried dependent student must file a tax return if his or her earned or unearned income exceeds certain limits.
Myth: You don’t have to pay taxes on cryptocurrency.
Fact: Cryptocurrency may feel as though it exists in a separate space than your taxable income, but in fact, it is still taxable. The IRS code was recently amended to include virtual currency, via the Infrastructure Investment and Jobs Act, signed into law in November 2021, and more crypto platforms are offering tax documentation to make it easier for users to report capital gains from crypto transactions.
Myth: Wealthy individuals don’t pay their fair share of taxes.
Fact: The top 1% of income earners pay a significant portion of the country’s total income tax revenue. According to the Tax Policy Center, in 2018, the top 1% of income earners paid approximately 40% of federal income taxes.
It’s important to remember that paying taxes is a legal obligation, and wealthy individuals are not exempt from this obligation. While there are tax strategies that can help reduce tax liability, it’s important to work with a qualified tax professional to ensure that you are using these strategies in a legal and ethical manner. Good luck this year!