With the deadline for taxes approaching, it can be easy to lose money that could be yours by going too quickly through the process. Many people go wrong by putting their focus on the wrong things during tax season and miss out on money that could be made. Here are some common tax myths that you should know about:
Common Tax Myth #1: “I’m doing things right if I’m getting a big tax refund”
It may be nice to receive a big refund every year, but you may not be saving on your taxes. Looked at from another vantage point, you are lengthening loan repayment periods and failing to earn interest on your savings. The wisest thing for a person to do is to reduce the taxes paid every year to create extra wealth. If you have a plan in place to save on taxes, then you can cut down on the money being withheld and enjoy bigger paychecks. Then you can work towards paying off debts that continue to accumulate interest throughout the year.
Federal refunds are often offset against other liabilities like student loans or child-support payments. If you owe money on anything, it is best to use any extra money to pay off what you owe immediately so that interest does not accumulate. Ideally, you want to get free from those debts that are going to cost so much more over the long haul. Adequate tax preparation can go a long way in helping you get free from the burden of debt.
Common Tax Myth #2: “I’ll be tax-free when I retire”
While many in retirement do not pay taxes because their income is so low, it is not wise to live based on this kind of future expectation. If you are successful at all, you will have taxes to pay in your retirement years. Although 401(k) contributions are tax-free, they are not tax-free when they are taken out of the account.
For many people, retirement brings more tax burdens. The main sources of income are from retirement accounts, investments, and Social Security. Taxable income may be higher in retirement, meaning more taxes will have to be paid.
A Roth IRA is good to start before the tax deadline approaches. Withdrawing money from a Roth IRA is tax-free if the account is older than five years old or if you are older than age 59. A Roth IRA can ensure that some of the money you draw upon in retirement will indeed be tax-free money.
Common Tax Myth #3: “I can keep myself from being audited”
It is hard to say what the process entails for selecting the people who get audited. All we can say is that if anything looks questionable on a tax return, the likelihood of being audited is far greater. Sometimes audits are pretty random and a tax return may have nothing whatsoever to do with an audit.
But audits are not typical for most people, nor are they really that scary. Most audits are simply done through the mail and do not involve direct personal interaction except in rare circumstances. And more often than not, the IRS is more concerned with businesses than they are with individuals.
However, this does not mean that people are safe to take chances on being dishonest or inaccurate when filing their returns. A random audit can come with some pretty stiff penalties if something amiss is discovered on a tax return.
Common Tax Myth #4: “I can expand my small business without being taxed”
Expanding a small business can be costly and come with liabilities during tax season. You should know about your obligations to every level of government—local, state, and federal– before you expand your business. If you go into the process unaware of what to expect, you may pay for it later in back taxes, penalties, or additional fees.
Common Tax Myth #5: “I guess I can’t use my child as a tax deduction since he or she is working”
This is not necessarily true, either. The main consideration for whether or not your child may be a dependent all comes down to how much support your child receives from you. Your child is considered your dependent as long as you are giving him or her over fifty percent of their support. Do not miss the nice one-thousand dollar tax deduction per child.
Talk to a tax professional if any of these common myths describes you and come up with a better way forward. Be prepared for tax season before it comes along and do everything you can to cut down on the taxes you have to pay. Use the extra money that you save to pay off the debts that could haunt you later. And plan wisely for the years ahead by setting good patterns now.