Eleven tax myths, debunked

Eleven tax myths, debunked Courtesy: Kelly Phillips Erb TAXGIRL

1. You have to itemize to take advantage of tax deductions.Yes, many of the most popular tax deductions (think home mortgage interest and medical expenses, for example) require you to itemize, or file a Schedule A, in order to take advantage of the benefit. But not all tax deductions require you to itemize. A number of deductions can be found on the front of your federal form 1040 at the Adjusted Gross Income section (generally, lines 23-37). Those deductions are sometimes called “above the line” deductions and are available to you whether you itemize or claim the standard deduction. They include such popular items as the Tuition and Fees Deduction, Alimony and Moving Expenses. The take away? Save those receipts and keep good records even if you don’t itemize.

2. You don’t have to claim payments received so long as they are under $600. This is probably one of the most repeated tax myths out there. So, let me clear it up for you quickly: income is income, no matter the amount. The threshold for required reporting from the payor is $600 which means that if payments are at least $600, a federal form 1099 must be issued. Some folks believe that if no 1099 is actually issued, you don’t have to report it. That’s not true. You have to report all of your income, from whatever source, on your tax return unless it’s otherwise excluded.

3. Head of Household status applies to anyone with kids. At some point, I realize that almost all parents assert to their kids in a very loud voice that they are the head of the house. But that definition and the one allowable by IRS are not the same: you can only file as Head of Household (HOH) if you are unmarried (!) and provide a home for a dependent. That means you must be single, divorced, or otherwise unmarried at the end of the tax year and (1) you paid more than 50% to keep a home for the entire tax year for a parent who was a dependent OR (2) you paid more than 50% to keep a home for the entire tax year with your dependent (there are some exceptions to this rule). You are considered unmarried for purposes of HOH even if you were not divorced or legally separated at the end of the tax year if all of the following apply:
  ♦ You lived apart from your spouse for the last 6 months of the tax year (don’t count temporary absences for business, medical care, school, or military service) AND
  ♦ You file a separate tax return from your spouse AND
  ♦ You paid over half the cost of keeping up your home for the tax year AND
  ♦ Your home was the main home of your child, stepchild, or foster child for more than half of the tax year AND
  ♦ You can or could claim (under the rules for children of divorced or separated parents) this child as your dependent.

4. You’re out of the woods with IRS if you make it 3 (or 5 or 7) years without filing a return. For most taxpayers, the statute of limitations – meaning the time the IRS has to examine your tax return – is three years following the date of filing or the due date of your tax return, which ever is later. But. There’s a bit exception to this rule: if you don’t file a return at all, the statute of limitations never actually runs. In that event, you’ll want to hold onto your records, well, for forever (really, it’s much less work to simply file).

5. You are not responsible for mistakes on your return made by your tax professional. Tax professionals are human and they make mistakes just like anybody else (hopefully, fewer than anybody else when it comes to tax returns). It happens. However, that doesn’t excuse you as a taxpayer. You still have a responsibility to read and understand your returns before you sign them. And if there’s a problem, it has to be fixed and that becomes your responsibility. The extent of the tax professional’s responsibility might figure into any mitigation for penalties (or any civil or contract claims you might have against the tax professional) but the IRS buck stops with you.

6. Fixing a mistake on a tax return will result in an audit. Taxpayers are often afraid to amend their tax returns because they feel that it might increase the chance of an audit. But that’s wrong, wrong, wrong. Amending your return when you find that you’ve made a mistake is a good thing. Amended returns don’t increase your risk of audit but mistake-laden ones do.

7. After the age of 55, you can sell your house tax-free. Well, true… in 1996. The rule used to be age dependent but changed under President Clinton (which may or may not have contributed to the bubble). Now, the rule is that a taxpayer can exclude from gross income up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of a personal residence so long as you’ve lived in it for two of the last five years. This rule doesn’t apply to second homes or vacation homes – and it’s not a one-time deal. You can sell and sell and sell and exclude away so long as you meet the rest of the criteria.

8. Minors don’t have to file and pay taxes. This can be true but isn’t always. Whether or not a child must file a federal income tax return — and the rate at which the child pays tax — depends on whether it is earned income (income from wages, salary or self-employment) or unearned income (generally passive income like money earned from dividends and interest). Even if a child’s income is to be taxed at the child’s parents’ tax rate, that does not necessarily mean that the income has to be included on the parents’ tax return; the child can opt to file a separate return (and in fact, that can sometimes be preferable for all kinds of reasons, including the dreaded AMT).

9. Getting the biggest tax refund possible is the best possible result at tax time.  Yes, getting a refund is much more fun that owing at the end of the year. But moderation, folks. The average refund last year was nearly $3,000. That’s a lot of money. Your money. And you’re not getting paid any interest while the government hangs onto your cash. Plan wisely.

10. Employer-provided health insurance is taxable. There have been a lot of rumors flying fast and furious about what’s happening to employer-provided health insurance for 2012. The amount of benefits paid on your behalf will appear on your form W-2 as a reported item in Box 12, using code DD. Under the new health care plan, there may be a penalty for a taxpayer who is not covered by health insurance. The reporting requirement will eventually assist the IRS in verifying that taxpayers have coverage. Additionally, the new reporting requirements will help identify those taxpayers who will be subjected to the so-called Cadillac tax on high-dollar insurance plans (effective in 2018).

11. Receipt of a refund means the IRS agreed with my tax return. No. Receipt of a refund means that the IRS mailed (or direct deposited) money that you said you were entitled to. It does not mean that the IRS agrees with what you reported; it merely means that the initial information you included didn’t raise any flags, your math didn’t stink and the Treasury didn’t offset your refund with any federal obligations.