Setting The Record Straight On Common Tax Myths
Posted by: Brookside Admin
If you had a bad experience with your taxes last year, waiting until tax time of next year to make changes likely won't be a big help. Instead, it's important to identify areas you had trouble with and change them as soon as possible so those changes can be reflected in next year's taxes. Seemingly minor changes like adjusting the amount of taxes withheld from each paycheck could have a significant effect on next year's return. To help you make next year's taxes easier, it's important to have accurate information about taxes. Here are a few well-known and widely accepted tax myths and the truths behind them.
- Deducting rent
Many individuals believe that rent qualifies as a deduction on their taxes. This likely stems from the fact that a business's rent does qualify as a business expense deduction. For your personal taxes, however, taxes paid for your apartment or your rental property aren't any different than a mortgage in the eyes of the federal government. Paying for your residence doesn't qualify you for any tax breaks. However, there are some states that allow for rent to be deducted. Be sure to research this or talk with a professional to find out if your state allows rent as a deduction.
- Filing Schedule C
If you have a small side business, the IRS requires you to file what's called a Schedule C form, which may also include a self-employment tax. A common argument, however, is that a side business isn't really a business. Rather it's just a hobby that happens to produce sellable goods or services. While it is possible to take in money for a hobby without it being an official business, it typically comes down to how you conduct your hobby and whether it's profitable to determine if it's actually a business. While the IRS's questions on this topic are a little vague, for example 'do you carry on the activity in a business-like manner?', there's one rule that's clear. If your hobby shows a profit in three of the past five years, it's a business. Also, if you depend on money made from your hobby for your livelihood, it's a business. In these cases, filing a Schedule C is mandatory.
- Retirement and Taxes
When you retire, you're no longer making a traditional income. Many assume that this fact also means that they no longer need to pay taxes. Unfortunately, that's not the case. Any income other than Social Security benefits is taxable and requires a formal tax return. This means if you're receiving annual retirement benefits from your past employer, you technically still have a taxable income. For Social Security payments, individuals are granted up to $25-thousand tax free, and up to $32-thousand for married couples filing jointly. For any additional income, however, be prepared to be your taxes.
- Cash payments
If you're paid in cash, the IRS has no record of the payments and can't tax that income, right? Wrong. While there may be no paper trail of the initial transaction, the IRS is likely to notice if you omit a large sum of money you received in cash because your income will be significantly lower than expenses they do have record of, like your mortgage. Cash payments aren't tax free, they just aren't taxed at the time of payment. You're expected to report all of your income, regardless of how you received it, on your taxes. Failure to do so usually ends badly.
Did you file an extension before April 15th? This means your tax return isn't due until October 15th, but it doesn't mean you don't owe any money until then. If you suspect you may owe additional taxes this year, you're expected to have that payment into the government by April 15th. Delaying payment results in late penalties. So, pay your estimated taxes by tax day, then get your official tax return in by the extension deadline.
If you need help with any tax related problems, call the CPAs at Brown Kinion and Company today. We have offices in Tulsa / Bixby and Broken Arrow for your convenience.