US tax rules and regulations keep getting complicated every year. Successive governments introduce new rules based on the party’s platform and every year there are modifications to tax laws as some time-specific credits expire, whereas some brand-new credits and rules are enacted.
Have you recently laid your eyes on a tax book? It is quite a heavy load and even intelligent tax experts are not excluded from making mistakes when filing taxes. Among the general population, there are numerous misconceptions about tax rules which can end up costing you substantially in terms of interest and penalties assessed by the Internal Revenue Service (IRS) because you did not abide by the rules. We list below a few common myths which should be shattered.
When you request an extension to file your taxes, the only delay you are afforded is on the deadline to file your tax return. The deadline is extended from the typical April 15th date to October 15 of the year in which your tax return is due.
You absolutely do not get an extension on the deadline to pay your taxes. This deadline stays at the original date of April 15. People make the assumption that the taxes owed deadline is also delayed because they have not yet calculated their income tax for the year. This might be logical reasoning, but we don’t know anyone who claims that tax rules are logical!
You have to estimate how much taxes you will owe and pay that amount by the April 15 deadline. Fail to do so and the IRS will come asking for interest and penalties, which start accruing the day after the deadline. You can avoid penalties if you pay 90% of the taxes owed by the deadline, but interest will still accrue on the outstanding balance.
The misconception was aided a few years ago when the IRS granted a six-month tax payment extension to struggling taxpayers. This added to the myth tax payment due dates are also extended when a tax filing extension is requested.
The point to take away is tax rules do not always seem reasonable, so get educated about a rule if you are not sure how it applies.
Taxpayers often assume they will not have to remit any taxes in a year which saw them sell off stocks or property and experience big capital losses. Not true! Only $3,000 of your capital losses can be applied against your ordinary income, so you will definitely be on the hook for income tax if you have regular employment.
Another myth is the belief you do not have to declare the sale of stocks on which you had a capital loss. This may seem reasonable as a capital loss will not generate any tax payable to the government.
However, since 2011, taxpayers must report the sales of all stocks, including the ones on which you experience losses. You also need to share the cost basis, typically the price of the shares when you bought them, with the IRS as well.
This information will be provided to you by your investment broker, but a word of caution: investors have reported mistakes in cost basis amounts provided by their brokers so don’t assume the information provided is error-free. Take the time to review your investment statement and ensure the data provided is accurate.
Another false assumption which may on the surface seem rational is the thought that if you do not receive the dividend income generated from your investments since it has been reinvested, you do not have to pay taxes on the dividends. This is a false notion. Whether you get to spend your dividend income now or reinvest it as part of a thought out investment plan, you have to pay tax on the revenue.
Legally any payments you receive for employment must be reported on your tax return, even if it’s cash payments.
If you believe you are too young to pay taxes, you have to reconsider the rules. Uncle Sam requires filing of a tax return if a child earns more income in a year than the standard deduction. This amount is set at $6,300 for 2015 and tends to increase slightly every year.
A recent death in the family is always a tragic moment, but the IRS will still butt its head in at this difficult time. Representative for the deceased person have to submit a final personal tax return. There may be other requirements as well, such as the need to file an estate tax return. Taxes due have to be paid by the estate of the deceased.
The above examples are but a few of the misconceptions which exist in regard to filing and paying taxes. If you are unsure of the validity of a rule, do some research or ask a tax expert to ensure you are not running afoul of the IRS.
Asharp Bookkeeper