The National Association of Enrolled Agents reports even smart taxpayers can make mistakes, while filing their taxes. This is because of the complex tax code that confuses not only the lay man, but also the astute ones.
In order to help you out and make tax filing easier, we have come up with the 10 most common misconceptions that people have about taxes. These misapprehensions are collected by enrolled agents nationwide. (If you do not have any clue about enrolled agents, they can prepare tax returns for you as well as represent you in front of the Internal Revenue Service.
Common misconceptions of taxpayers
1. No payment in case you file for a tax extension
This is one of the biggest misconceptions of taxpayers. When you file for a tax extension, remember you get a time extension to file your tax returns, not a time extension to pay them. For instance, if you owe $1000 on your personal tax returns and file a tax extension, you can file your returns till October 15. However, if you still owe your taxes by April 15, penalties and interest will begin to accrue.
In order to avoid a penalty, you ought to pay atleast a minimum of 90 per cent of your owed taxes or 100 per cent of your tax liability before April 15. Thus, if you do not pay your taxes in full, you will have to pay interest and perhaps penalties on the uncovered liabilities. The IRS has even announced a six-month grace period for struggling taxpayers.
2. No income tax to be paid if you have incurred a huge loss in the stock market
This is however not true. You still have to pay taxes to some extent, even if you have had a huge loss in the stock market in a particular year. The capital loss deductions for ordinary income are limited to only $3000.
3. No reporting of sales in which you incurred losses
This is not really the case. You have to report the sales, even if you have incurred losses in stocks or did not make any money from them. The sales should be reported on the returns of the taxpayer. The cost basis or the purchase price of the stocks bought in a particular year must be provided by the taxpayer and broker to the IRS. This information is provided by brokers to taxpayers, but taxpayers should also ensure that the information provided to them is correct.
4. No need of paying taxes on dividends that are not received
This is absolutely false. You have to pay taxes on dividends, irrespective of whether you invest again in them or do not receive them. This is because dividends are considered as income.
5. No need of reporting cash income
This is wrong. You must report your cash income, as it is still counted as your income.
6. No need of paying taxes if you are too old or too young
No matter how old you are, you still have to pay your taxes. Your returns should be filed even after your death. The government asks a decadent’s personal representative to file the last personal tax return, and probably pay the due taxes and file an estate tax return. In addition, if you are a dependent high school student, you are still supposed to file a tax return if you are earning an income of more than $5,700.
7. A misplaced document is not taxable
Most of the taxpayers, who make their own returns, do not include significant information in the taxable amount, just because the document was never mailed or they did not include something in the mail. Good tax preparers always provide a checklist for all the misplaced documents.
8. Foreign income is not taxable
This is entirely untrue. No matter from where you have earned your income, in whatsoever country, you must report all your earned income sources to the IRS. Otherwise, you can face high penalties for income earned abroad or for not documenting your foreign financial accounts.
9. Your hobby income is not taxable
Income is income, regardless of what type of income it is. You must report your income, even though you have earned it from your hobby.
10. The IRS does not pay heed to your state tax refund
This is a big misconception. Taxpayers who record their deductions are permitted to withhold their federal returns or deduct their all paid state taxes. Thus, paying taxes on the refund of last year means correcting a previous year’s over-deduction.
Now, you know that some of the things that you thought to be true about taxes are actually not true. These explanations about common misconceptions will helpmost of the taxpayers to file accurate tax returns by the end of every year.
ERNIE BUSTAMANTE