Tax Myths - Don't leave money on the table for the IRS

According to Wikipedia, “Myth is derived from the Greek word mythos, which means ‘word of mouth.’"

Since tax law is complex and constantly changing, it’s no surprise that many taxpayers have misconceptions about the rules that apply to them.  Many count on provisions that have expired, or apply to someone with different circumstances.  In this article we will address some of the most common myths about taxation in the United States:

I don’t need to rush to claim my refund, because I can always collect money owed to me by the Treasury. 

The IRS will not issue a refund more than three years old.  On April 15^th of this year, the books will close on tax year 2004, and any unclaimed refunds will disappear forever.  Last year, the IRS stated that about 1.8 million people who had not filed their 2003 federal return had unclaimed refunds totaling about $2.2 billion!  So, do you want your money, or do you want to let the government keep it?  If you want it, we can help you get it.  Visit any of our local offices to help you file a return. 

If I sell my home, I need to reinvest the money in a new one quickly, or I could end up owing a lot of tax.

This provision expired almost ten years ago.  Under current law you may exclude up to $250,000 of gain if you’re single, and $500,000 for a couple filing jointly.  You must have owned and lived in the house for two of the past five years, though there are exceptions to that rule if certain circumstances led to the sale.  Congress recently extended the $500,000 exclusion to widows and widowers for two years after their spouse’s death, so that these taxpayers don’t feel the need to rush a sale, effective with the 2008 filing year.

Note:  You cannot deduct a loss on the sale of your home.

I want to deduct my state and local sales taxes, but:

• The law expired
• The state where I reside has an income tax
• I have to use the IRS tables to figure the deduction, and that’s all I can take.

1)      The law expired for tax years after December 31, 2007, so it still applies to returns being filed for 2007.  It could be renewed again before the end of the year for 2008.

2)      The deduction is more useful in states without income tax, but it can sometimes benefit those in states with income tax. 

3)      The IRS does have tables based on income, exemptions, and the tax rate where you live, but big-ticket items (cars, boats, etc.) may be added to the total.  This provision can be particularly beneficial in the year a taxpayer buys a costly item like a car or boat.

As a student, I don’t have to pay taxes

Students must report their income the same as other taxpayers.  Many do not pay taxes because their income did not reach the filing threshold of $5,350 of earned income for 2007 ($5,450 for 2008).   

My dependent has a job now, so I won’t be able to claim him anymore

Each dependent on a tax return allows the taxpayer an additional exemption, which is a subtraction from income before tax is calculated.  For 2008, the subtraction is $3,500 per exemption.  This can make a significant difference in the year’s tax bill. 

For children 18 and under and students 23 and under, it is support and not income that determines who gets the exemption.  If the parent still pays more than half of their child’s living expenses, the exemption belongs to the parents.  The IRS counts transportation and recreation expenses in addition to food, lodging, clothing, and medical expenses, so that $300 surf board your child bought actually counts as support, as so does the TV you bought for his room. 

The child’s income does factor if they have reached 24, or if they have reached 19 and aren’t a full-time student.  $3,300 is the most these older children can earn and still be claimed as dependents. 

I’m married, so I have to file a joint return with my spouse

If you are legally married on the last day of the tax year, you can’t file as single, and normally you can’t file as head of household.  But, if you and your spouse lived apart the last six months of the year, and you paid most of the cost of maintaining a home for you and your child (step-child, foster child), you are “considered unmarried” by the IRS, and are allowed to file as head of household. 

And there’s also another option.  Married filing separate is a status that is always available to married taxpayers, it is just rarely beneficial.  Many credits, including the earned income credit, are not allowed to separate filers, among other restrictions.  For a few taxpayers, there are advantages that outweigh the disadvantages.   

I’m more likely to be audited if I complete an extension to file my taxes.

No.  There’s no connection between requesting an extension and being audited.

I shouldn’t file my tax return until I have the money I owe the IRS.

While the IRS doesn’t LIKE it if you don’t pay the money you owe them, they REALLY DON’T LIKE it if you don’t even file your return.  As a matter of fact, it’s a crime to not file your return.  So, file your return, and pay what you can.  The IRS will contact you to set up a payment program – but it wil include interest and penalties on what you haven’t yet paid.

My parents live in a nursing home, and I’m paying their expenses, but I can’t claim them as dependents.

This rule doesn’t apply to your parents or your children.  If you support your parents, you can claim them as dependents; no matter where they live.

My grandmother left me some money as an inheritance.  It’s nice, but now I have to pay taxes on it.

Not true.  The tax on the money left to you has to be paid by the estate of the person who died.    This only applies to income you received as an inheritance.

I receive tax exempt income, so I don’t need to worry about paying tax on it!

Don’t be so sure of that.  You may not have to pay FEDERAL tax, but you may have to pay STATE tax on this income.

I have a retirement plan where I work, so I don’t need to set up an IRA.  It won’t help me from a taxation standpoint anyway.

If your income is below $35,000 you may be able to deduct all or part of your IRA contribution, regardless of whether you have an employer sponsored retirement plan.

PRO-TAX is here to help “dispel myths” and help you get the biggest refund possible.  If you have more questions about these topics please visit one our offices.

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