Breaking news: the IRS has given Americans an extra month to file this year’s taxes. May 15 is now the due date. (Since that falls on a Saturday, you’ll actually have until Monday, May 17, to have it all done.)
Taxes can be frustrating enough on their own. There’s certainly no need to try to complicate them further, but there are some common myths about them that people fall for all too often.
We’re in the business of guiding people through complex financial situations. So with a couple of months to go, we thought this would be a good time to point out some of the common tax myths people believe.
Hopefully, we can save you some headaches (and maybe even some money) in the process.
Tax Myth #1 – “If I can’t pay, I don’t have to file.”
Sorry. While there are often legitimate reasons not being able to pay taxes you owe, the IRS still requires everyone (with few exceptions) to file a tax return on time. Regardless of your ability to pay, go ahead and send your return. Then contact the IRS. They will usually work with you to set up an extension or payment plan, but they’re much less likely to be cooperative if you haven’t even bothered to file. If you’re having tax problems, we can help you solve them! Give us a call to find out more.
Tax Myth #2 – “Well, there’s no U.S. law that requires me to pay income tax.”
It would be nice if it were true, but those who have promoted this misconception since the mid-1980s are incorrect.
The Sixteenth Amendment to the U.S. Constitution permits Congress to impose an income tax. Supporters of this myth like to say, “Ah, but it was never ratified.”
Unfortunately, it was indeed ratified and became part of the U.S. Constitution in February 1913 when Delaware, Wyoming, and New Mexico approved and became the last three states needed to add the amendment.
Now, the U.S. Internal Revenue Code makes it clear that everyone with an income must file a return, and numerous court cases all across the nation have continued to uphold the constitutionality of our federal income tax laws ever since. For everyone.
Tax Myth #3 – “Big corporations don’t pay any taxes.”
Every year, we hear stories of major companies paying zero income taxes. On the surface, it doesn’t seem fair. However, if you dig deeper, you discover that the headlines can be misleading.
Corporate taxes aren’t calculated using the same accounting methods that businesses use in order to look as profitable as possible to their shareholders. Companies that look like they should be profitable may not actually be. Businesses report “book value” publicly on their financial statements, but the government looks at “taxable income” when deciding how much they need to pay.
Taxable income is determined by three main factors:
- Net operating losses. Losses in one year can be spread out over future years. If the losses are big enough, it could result in zero taxes for several years in a row.
- Where revenue comes from. Multinational corporations get tax credits in the U.S. for taxes they have to pay to foreign governments.
- Capital investments. U.S. tax law allows companies who invest in things like new equipment and machinery to deduct a large percentage of those purchases in the same year in which they buy it.
So it’s entirely possible that the major corporation being roasted on the news for paying zero taxes is involved in some or all of the above factors. Also, while they may not be paying federal income taxes, there are also state, payroll, property, and excise taxes that they are paying regardless.
Tax Myth #4 – “A big refund is a good thing!”
The only thing a refund indicates is that you withheld more taxes than necessary during the course of the year. You simply gave the government too much money, so they’re returning the extra.
The average tax refund in 2019 was $2,535. That’s money that could have been used or invested throughout the year, and unavailable to you. Some people like to think of their refund as a mini savings account, but in reality it’s money that was essentially given as an interest-free loan to the federal government. You’d be better off to receive it throughout the year and regularly add it to a money market account if savings is the goal.
Ideally, you want your taxes to be as close to $0 as possible. If you receive a W-4 from an employer, you can use the IRS Withholding Calculator to know how much you need to adjust it for next year.
Tax Myth #5 – “My pet is part of the family, so I can claim it as a dependent.”
While some people treat their pets like their children, unfortunately the IRS doesn’t see them that way. It may be true that they count on you for more than half of their funding (the requirement for being able to claim someone as a dependent). And it may be true that your vet insists on announcing that “Fluffy [insert last name]’s parent is here to pick her up”. The truth is that pets aren’t human…and they don’t have last names.
Trying to convince the IRS otherwise is considered fraud. We advise against it.
Enough with the tax myths! How about some truth instead? It’s a good idea to hire a tax professional!
Hiring a professional for tax prep keeps you from falling victim to costly myths, and it saves time, money, and stress in the long run.
If you’re afraid of running into potential tax problems, we wrote this free guide to help you identify 9 Simple Accounting Mistakes That Are Costing Your Business Money.
Schedule a call with our team today to learn more!