Top Five Tax Myths and the truth.
It doesn’t matter what your friend’s cousin’s co-worker said. When it comes to taxes, it’s best to get the word from a credible source.
In 2016 the Washington Examiner reported there were 74,608 pages in the federal tax code.
Some of these pages are the tax code itself. Some are written about the tax code and case law that are important to be aware of as well.
Two years later, you can bet there are even more pages to contend with.
So it’s easy to see why people want a shortcut through this paper mountain to get to the truth.
Let’s start with dispelling the top myths about taxes.
#1 Tax Myth: You can choose whether to file taxes or not
Nothing is inevitable except death and taxes.
Although some folks under certain circumstances don’t need to file a tax return, it’s not voluntary. Unless the criteria below apply to you, you must, by law, file a tax return for 2017:
- If you have $10,400 or less in gross income, are single and under 65.
- If you are single and over 65, you can make up to $11,950 in gross income without having to file a return.
- If you are married filing jointly and both of you are under 65, you can make up to $20,800 and not have to file a return. If one of you is 65 or older, you can make a maximum of $22,050 and if both of you are 65 or older, that maximum climbs to $23,300.
- If you are married filing separately, no matter what your age, your maximum gross income is $4,050 before you have to file a return.
- If you are the head of household, under 65, and make $13,400 or less, you do not have to file a return. If you are over 65, as head of household you can make up to $14,950 without filing a return.
- If you are a Qualifying Widower under 65, your maximum gross income is $16,750. For Qualifying Widowers 65 or older, that maximum is $18,000.
Even if one of the above is true for you, you still may have to file if one of the following also applies to you:
- If someone can claim you as a dependent, you’ll need to file if your earned income is above $6,350.
- If you have gross income over $1,050, and more than $350 of it came from a source other than earned income, you’ll need to file.
- If you hire domestic employees, you’ll have to file a return.
- If you are self-employed and earn more than $400, you’ll have to file a tax return.
- If you receive distributions from a tax-favored account like a medical savings or HSA (health savings account), you’ll need to file your taxes.
- If you receive tips and have to file for payroll taxes on them as part of your income, you’ll need to file.
Now, you may want to file a return anyway. If you are due a refund or can take advantage of earned income tax credits, why would you not file a return?
Please also note that, as your income and circumstances change over the years, you’ll have to keep checking to see if you need to pay taxes. Just because you aren’t required to file one year doesn’t mean you get a free pass for life.
#2 Tax Myth: If you claim expenses for a home office, you will be flagged for an audit
Does claiming a home office automatically flag you for an audit? Not necessarily.
If you actually qualify for this deduction, and the amount isn’t higher than what would be normally expected, it’s not going to hurt you to claim it. Just be sure the space you claim is used exclusively for business (and not as a kid’s jungle gym after hours).
In 2003, the IRS introduced the simplified method of claiming a home office. If you use this method, you are not unusual.
With half of Americans work from a home office at some point in their lifetime, this a much more common deduction than you would think.
And if you are an employee versus self-employed, it’s a whole other ball game.
#3 Tax Myth: You don’t have to pay taxes on illegal activity
Wrong! The IRS cares not where your income came from or whether it is above board or not.
You must claim all income, no matter what the source.
The IRS doesn’t proactively notify law enforcement when this income shows up on tax returns unless it relates to terrorism. However, this information can be obtained with a court order by law enforcement.
There are probably not too many criminals choose to own up to this, as you can imagine.
Consider this though: If you do have income from illegal activity and you’re about to be caught red-handed, you’ll get dinged twice.
You will get one charge (or more) for the original crime, and another for tax evasion.
As always, it is better not to engage in illegal activity in the first place. But if you do, the IRS expects you to claim it.
Remember Al Capone? It was tax evasion – not bootlegging or other crimes – that sent him to prison.
#4 Tax Myth: You can claim pets as dependents
Anyone who has a pet knows that they are family!
However, as much as pets may feel like children, they aren’t… at least in the eyes of the Federal government.
You cannot claim your pets as dependents nor can you claim their medical expenses. Sorry, Fido!
Now, you can claim the expenses of moving your pet as a part of your move, if you had one.
Also, if you put a pet to work (such as guarding the office while you are away), you may be able to claim your pet’s expenses. Any donations to pet-related organizations can be written off as well.
Certain expenses for guide dogs can be deducted if you use one for your vision or hearing problems.
Expenses for trained, certified therapy animals for a diagnosed mental or physical condition these expenses may be able to be deducted as well.
If you earn money from your pet, such as winnings from a dog show, that is taxable income. Expenses related to generating that income are tax deductible (if it exceeds 2% of your adjusted gross income).
So the short answer is no, you can’t claim your pet. But as with every rule, there are some exceptions. Problem is, most of us don’t qualify for those expense deductions.
My advice? Get a pet for companionship and love… not as a tax write off.
#5 Tax Myth: I don’t make enough money to get audited
Even if you aren’t rolling the dough, you can get audited.
In fact, those with much higher and lower income have a higher chance of being audited according to the Tax Foundation.
Let’s take a look at how this played out in 2015.
For that tax year, the overall chance of being audited was .8%.
Yet, for those with no adjusted gross income, 3.78% of returns were audited.
You can’t get much if any lower than zero, yet chance of an audit was nearly 300% more! (Statistics were not available for those claiming a loss… but we won’t get into that here!).
Now, on the other end of the spectrum, those who made $200,000 or more were more likely to be audited, and the chance increased along with the level of income.
Those who made $200,000 to $500,000 were twice as likely to be audited. Sounds unfair? Maybe, but only 3.81% of those returns were audited, which is about the same percentage of those with no income.
Now, those making over $10 million were 4000% more likely to get audited. In fact, over one third of those returns (34.69%) were audited in 2015.
What was the income level with the least chance of being audited? Individuals and households making $50,000 to $75,000 per year… only .47% of those returns were audited.
The Not-So-Final Word
As you can see, taxes are a complicated field.
Not only are there an ocean of “if this, then that” scenarios, things are constantly changing. What you heard five years ago – or even three months ago – is probably outdated now, or even patently false.
It’s always best to look for expert, credible advice when it comes to income tax. With the possibility of penalties and compounding interest, the stakes are too high!
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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for The Tax Relief Company.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.
The book is available in paperback and ebook on https://Amazon.com
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For more on SFS Tax & Accounting Services, visit https://sfstaxacct.com/
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Phone: 772-337-1040
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