Tax deadline day -- April 17, 2018 -- is right on top of the American taxpayer.
Even so, rushing through your financial obligations with Uncle Sam is never a good idea. That's where mistakes are made, and that's where you can lose money to the federal government that otherwise belongs in your back pocket.
To shine a spotlight on the topic, let's review some top tax myths cited by several accountants, tax preparers and other tax professionals that taxpayers ought to know before filing their tax returns.
Chances are, if you fall for these myths, you'll pay the price on your suddenly diminished tax returns this year.
The tax liability reduction myth. Whether medical expenses, unreimbursed employee business expenses, real estate taxes, or having a child, people often believe that something is giving them a tax benefit when it actually isn't, says Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group in Austin, Tx.
"Depending on your situation, you might not be eligible for some popular tax breaks," Sullivan says. "Many deductions must be above a certain threshold before you get a benefit. High-income taxpayers are also phased out of certain deductions and exemptions. Tax planning moves that help an individual subject to the regular income tax may even hurt a taxpayer subject to the alternative minimum tax."
The "it's all about cutting your taxes this year" myth. Proper tax planning goes beyond just making one-time moves at the end of the year or near tax time. "To minimize your tax burden, you need to continually consider how you structure your finances," Sullivan notes. "Consistently funding retirement accounts, investing in a tax-efficient manner and managing the type and timing of income you receive are essential."
The "I can go it alone" myth. Many taxpayers wait until a week before the filing deadline (one in seven taxpayers do so, according to the IRS), and insist that they can do their taxes without professional help, says Patrick R. Colabella, professor of accounting and taxation at The Peter J. Tobin College of Business at St. John's University. "These tax filers also believe that over withholding benefits them," Colabella says. "They also don't think that they can do anything if they don't receive a W-2 tax form, and don't know what do if they need an extension."
The "home office" myth. Another myth that crops up time and again is how the home office deduction leads to tax trouble. "Many self-employed taxpayers believe that if they take the deduction, they are automatically triggering an audit by the IRS," says Thomas J. Williams, EA a tax accountant who operates Your Small Biz Accountant, LLC, a virtual boutique accounting practice. "However, as long as you have all the pertinent documentation and details to back up your claim, you should always report any deduction or credit that you are lawfully owed. Further, self-employed taxpayers don't realize that any business-related mileage deduction reported on the tax return could be placed in jeopardy when a home office location is not declared."
The "spouse as a dependent" myth. People often believe that you can claim a spouse as a dependent. "In reality, you are not able to claim them as a dependent," says Priya Mishra, managing attorney at Top Tax Defenders, a back-tax resolution firm based in Houston. Another spousal myth is that the non-working spouse should not be included on the tax return because he or she did not work, Mishra says. "This is incorrect because the taxpayer is paying taxes on $4,050 (2017 exemption amount) of income that can be excluded from their gross income," she notes.
Filing an extension means I can pay my taxes later. Filing an extension only extends the time to file your tax return, says Jenna Ivanoski, product manager at TaxAct. "You must still pay the estimated tax due, if any, by the April deadline to avoid interest and penalties," Ivanoski notes. "If you don't have all your forms yet or are still finalizing the books for your small business, you'll need to estimate those amounts to determine how much tax to pay."
Knowing the most pervasive (and sometimes the hidden) tax myths can wind up saving a good chunk of money at tax time.
That gives a taxpayer the ultimate April high -- keeping more money in their pocket, and less of it in Uncle Sam's.