Join me as we debunk some of the most common myths & misconceptions around taxes.
1. Myth: Tax Return and Tax Refund are Interchangeable
These two terms are often confused, but they are not the same thing. A tax return is the form you fill out and submit each year, like the 1040 form for most people. A tax refund is money you get back if you overpaid your taxes. Many people mistakenly say they're waiting on their tax return when they mean their refund.
2. Myth: You Need a License to Prepare Tax Returns
You don't actually need a license to prepare tax returns. While there are professional credentials like the Enrolled Agent (EA) or Certified Public Accountant (CPA), they are not required. All you need is a Preparer Tax Identification Number (PTIN) from the IRS to file tax returns electronically. Check your tax professional's credentials, as many practitioners are uncredentialed.
3. Myth: Living in a Home for Two Years Makes It’s Sale Tax-Free
Many believe that simply living in a home for two out of the last five years allows you to sell it tax-free. However, the IRS has rules regarding "non-qualified uses" for periods when the property was not your primary residence. Even if you lived in it for two years, gains related to earlier non-qualified use periods will be taxable.
4. Myth: LLCs Provide Tax Savings
An LLC is a legal entity and does not provide tax benefits by itself. If you set up an LLC and are the sole owner, it is disregarded for federal tax purposes. The taxes you pay and deductions you claim remain the same whether or not you have an LLC. Its primary purpose is legal protection, not tax savings.
5. Myth: You Don’t Need To Issue W-2 When Employing Your Kids
If you employ your children in your business, you still need to file W-2s and comply with all employer filing requirements. Just because their income may be non-taxable doesn't absolve you of this responsibility. Issuing W-2s also allows them to qualify for benefits like funding a Roth IRA.
6. Myth: Gifts Over $18,000 Cause Taxable Events
The $18,000 annual gift tax limit is just a threshold for when you need to file a gift tax return, not a trigger for tax liability. Taxes on gifts only become relevant once you exceed the lifetime exclusion amount, which is currently over $13 million. So, making gifts beyond $18,000 in a year does not mean you'll owe taxes.
7. Myth: Bonuses are Taxed at a Higher Rate
Bonuses are not taxed at a higher rate. They are subject to withholding at a higher rate, generally 22% or even higher if the bonus exceeds a million dollars. At the end of the year, your actual tax rate is calculated, and you may receive a refund if too much was withheld.
8. Myth: 0% Capital Gains Rate Only Determined By Gain Amount
The 0% capital gains rate applies to your total income, not just the capital gain itself. If your combined income and capital gains exceed the threshold, only the portion of income within that bracket qualifies for the 0% rate.
9. Myth: Income Below $600 from Self-Employment Isn’t Taxable
Regardless of whether you receive a 1099 form, all earned income from self-employment is taxable. If you earn over $400 in self-employment income, you are required to file a tax return, even if no single client paid you more than $600.
10. Myth: Moving Into a Higher Tax Bracket Taxes All Income at The Higher Rate
Only the portion of your income that falls within the higher tax bracket is taxed at the higher rate. For instance, if you earn enough to move from the 10% to the 12% bracket, only the income above the 10% threshold is taxed at 12%, not your entire income. This misconception often deters people from accepting bonuses or promotions unnecessarily.
Jul 18 202422 mins
33 mins