Tax season is filled with conventional wisdom-some of which may not actually be valid for every situation. Learn the truth about some common tax myths, so you can file your return with your eyes open.
After years of filing federal, state, and city taxes, you may think you know everything about the income tax process. However, accountants and other tax experts agree that even the most experienced filer can fall victim to common tax myths. Every individual or family’s financial situation is unique, and ascribing to a one-size-fits-all tax preparation method may not be the best option. Learn the truth about these key tax myths and break free from the cycle this tax season.
“A Larger Refund Is Always Better”
Many taxpayers maximize their withholding throughout the year, betting that they’ll get a giant refund come April 15. While withholding some extra can take the worry out of tax season-after all, you’ll be sure you won’t owe the IRS additional money-withholding too much can be detrimental to your personal or family finances. By essentially giving the IRS an interest-free loan throughout the year, you’re taking money out of your own pocket. If you find yourself paying for things on credit and struggling to keep up with monthly bills, think about how that extra cushion each paycheck might benefit you. Speak to an accountant in your area about creating a withholding plan that still provides a small refund, but gives you more to work with throughout the year.
“I Should Keep Spending-It’s a Tax Write-Off”
It can be tempting to splurge on tax-deductible items throughout the year. However, the payoff in your tax refund certainly won’t equal the cost of the items in question. And, like withholding too much, overspending reduces the money you have to work with year-round, in exchange for a lump sum that you might end up spending all at once on a big-ticket item. So if you’re buying that new tech gadget more because it’s tax-deductible than because you actually need it, think again. One note: The same basic theory applies to ongoing payments, such as mortgages and student loans. Talk to your CPA firm about whether it makes more sense to pay off those balances quickly or to spread them out and receive the accompanying tax deductions.
“My Computer Desk Counts as a Home Office”
People who work at home are eligible for a home office tax deduction. However, the IRS has very strict guidelines for what constitutes a home office. The biggest qualification is that your home office is your primary place of employment-so if you go to an outside office 40 hours a week, you’re not eligible to claim this deduction. Additionally, the home office must be used almost exclusively for business operations. Be cautious about claiming the home office deduction, and be vigilant about providing backup materials to support your claim. Claiming this deduction falsely can put you on the road to a tax audit.
“Paper Filing Is Better Than E-Filing”
Especially if you keep meticulous tax records, it can be comforting to file your tax return the old-fashioned way: on paper, through the mail. However, recent advances in E-filing have made this option generally the better way to go. For starters, you’ll receive your refund faster if you file your return electronically. According to government statistics, E-filed returns are also more accurate than paper returns. Plus, you’re avoiding the long post office lines. Most tax preparation services have the ability to E-file returns, and if you desire a paper copy for your records, it’s easy to print one out.