As tax season approaches, misinformation and myths about taxes abound. These misconceptions can lead to costly mistakes or missed opportunities. Let’s debunk some of the most common tax myths to help you navigate your finances more confidently.
Myth 1: "Filing for an Extension Means Paying Later"
Many people believe that if they file for an extension, they can delay their tax payments. This is not true. According to the IRS, while around 15 million taxpayers file for extensions each year, this only extends the time to submit your tax return, not to pay any taxes owed. Payments are still due by the original deadline, and failing to pay on time can result in interest and penalties. In 2020, the IRS collected over $3.5 billion in interest and penalties from late payments.
Myth 2: "Students Don’t Have to Pay Taxes"
Some think that students, because they are often not earning a full-time salary, don’t have to pay taxes. In reality, students must pay taxes on any income they earn. For example, if a student earns more than $12,950 in 2023, they must file a tax return. Scholarships and grants may also be taxable if used for non-qualified expenses like room and board. In 2018, over 1.5 million students filed tax returns, contributing to the $3.5 trillion in total tax revenue.
Myth 3: "You Don’t Have to Report Cash Income"
Income is income, regardless of the form it takes. Whether paid in cash, check, or through electronic transfer, all income must be reported to the IRS. Not reporting cash income is illegal and can result in severe penalties. The IRS estimates that unreported income leads to a $450 billion tax gap annually, significantly impacting government revenue.
Myth 4: "Tax Professionals Are Only for the Wealthy"
Many people believe that hiring a tax professional is only for the wealthy or those with complex finances. However, tax professionals can be beneficial for anyone. For instance, small business owners or freelancers can benefit from a tax professional's expertise to maximize deductions. According to the National Society of Accountants, the average cost for a basic tax return preparation is around $220, a worthwhile investment for many to ensure accurate and beneficial filing.
Myth 5: "The IRS Will Call You for Immediate Payment"
Scammers often impersonate IRS agents to demand immediate payment over the phone. The IRS will never call you and ask for immediate payment. They communicate primarily through mail and will never threaten arrest or demand specific payment methods like gift cards or wire transfers. In 2020, the IRS received over 2.2 million reports of scam attempts, resulting in losses of over $124 million.
By understanding these common tax myths, you can better prepare for tax season and ensure you are meeting your obligations correctly. When in doubt, consult with a tax professional to clarify any uncertainties and help you make the best decisions for your financial situation.
What tax myths have you encountered, and how did you discover the truth behind them? Share your experiences and insights with us!