Debunking the Myths About Paying Taxes
Tax myths: they are as common as the cold.
In general, myths are traditional stories born of individuals explaining natural or social phenomena. Normally, we associate them with supernatural elements like the Greek Gods, King Arthur and the Knights of the Round Table, the Chupacabra, voter fraud, and an easy-to-make sourdough. All jokes aside, myths are widely held as true, and they pop up in our daily lives. Tax myths, however, will do more harm than haunt you in your sleep. Misconceptions about paying taxes are spread far and wide, by word of mouth or the internet, but we are here to highlight those tax myths and set the record straight. Everyone’s looking for a rule book or guide on how to pay their taxes — so, let’s start with what NOT to do.
12 Tax Myth Busters
In a world of information overload, you can spend hours being lured into conspiracy theories on whether Tupac is still alive or watch episodes of people with bizarre food obsessions, like the woman who only ate cheesy potatoes and gagged when she tried a piece of broccoli (same, jk). The world’s saturated with information, but you need access to the right info to the important stuff. For that reason (plus, we love you and want you to thrive, you beautiful unicorn), let’s work together to debunk these tax myths, so you become tax-paying experts.
1. Tax Paying is Totes Voluntary
Ummm, NOPE. Some individuals believe that filing taxes is voluntary. Maybe because the US tax Form 1040 instruction book states that the tax system is “voluntary.” But it actually refers to the tax amount each individual is responsible for owing (so confusing, please clarify yourself, government). Unless the IRS/CRA says otherwise, it is a requirement. If you’re an American taxpayer who’s unsure, the IRS can help you figure out whether you must pay taxes with an online quiz. Play the game, we’ll bet that you owe some dinero.
2. Your Side-hustle is Tax-free
Yeah, FAKE NEWS. Do you tutor on the side? Have a freelance graphic design gig for a greeting card company? Wonderful! You’re getting dough from your side hustles (congrats, baby). However, be sure to report the extra income on your taxes. The government needs to know how much you made so you can contribute like a law-abiding citizen. This isn’t a bad thing considering there are credits and deductions you can qualify for even if you didn’t get a W-2 from your employer. For example, self-employed individuals can deduct home or vehicle expenses if they use them for business. Win-win.
3. Low-income Filers Don’t Get Audited
Absolutely, negative. When we think of those who get audited, we tend to think of those who a shite-ton of money. Individuals with income exceeding $100k get audited nearly twice as much as the latter. However, it’s possible that even if you’re low income, the government can sus you out. Be sure to keep detailed records of anything that could be considered a questionable tax deduction by holding onto whatever relevant recipes you’ve received in the last three years just in case you get audited. Never say never!
4. Getting an Extension Means Paying Later
Shaking head, no (vigorously). Busy time of the year? Totally understandable. If you think you can’t get your taxes filed by the deadline, ask for an extension. When you file for an extension, that means you are getting an extension on the paperwork, not the tax bill. Make sure you know the difference! You still need to pay taxes on time. And if you don’t, you will face penalties, fees, and interest charges.
5. Mistakes Can Lower Your Credit
That’s a negative. Everyone wants a decent credit score to claim savings, benefits, and access to loans and credit cards. Getting a loan from the bank will make buying that ’13 Going on 30′ pink dream house possible. So when it comes to filing taxes, some believe that making a mistake on tax returns will cause their credit score to come crashing down. The truth is, credit score calculations are separate; tax liens (outstanding debt owed to the IRS) are no longer a part of credit reports. However, this doesn’t mean that not paying your taxes won’t affect your credit score. If you’re late on paying your taxes, you can accrue penalty charges and fees, making it difficult to pay other bills on time, which can cause your credit score to drop once you fall behind on your payments.
6. My Cat Whiskers is My Dependent
Love you, Mister Whiskers, but noooooo! We all love our cats, dogs, and iguanas. They’re our best friends, family, and confidants, but that doesn’t mean you can claim them as dependents. But wait! What about all the wet food, treats, and toys I bought Whiskers, the kitten? Even if you have framed photos of your baby on your table and coo about them to your colleagues, the IRS/CRA does not see them as children. Why? They aren’t human, so do not claim them as dependents because it will be considered fraud. Steer clear.
7. Marriage Means I Must File a Joint Return
Sorry, lover. So, you decided to put a ring on it (good for you, marriage has a nice ring to it). Getting married is a partnership, and some couples believe that if you’re married, you and your spouse must file jointly. This can be a good thing since you can qualify for more tax credits, such as income tax credit and the child and dependent care tax credit. You’re also eligible for a larger standard deduction. If one individual earns more than the other, it’s possible that filing jointly can put you in a lower tax bracket. There are many benefits to filing together; however, it’s not actually a requirement. Depending on your circumstances, filing separately can be better. This is because you are not held responsible for your partner’s finances and can deduct significant medical expenses.
8. Claiming a Home Office Means I’ll Get Audited
No way, Jose. Once upon a time, home office deductions were said to result in an instant audit not so long ago. This is untrue. Claiming a home office is pretty common. We’ve seen cities go shut down during the pandemic to curb the rising COVID cases. So, if you are running your business from a home office now, go ahead and take that deductible if you work from home. And remember, fraudulent claims of a home office are problematic; however, if you actually do have a home office, you’re good. Honesty is the best policy here.
9. Student Don’t Pay Taxes
False. We all know the typical stereotype of the broke college student eating cup noodles for dinner every night and hoarding free pizza from student events. It’s an unfortunate reality for some, as tuition is no joke. Yet despite this, students can still pay taxes. If you are considered a dependent (your parents still claim you on their taxes) or are independent (from your parents for tax purposes) and make under $12,200 a year, you don’t have to file taxes as a college student.
10. No Taxes Are Owed on Money Lost in The Stock Market
When hell freezes over. Stocks are tricky. And they are even trickier when it comes to taxing them. Investors might think they can deduct their losses against their income and not have to pay anything. Nope! To get a deduction on stocks, they must be sold, becoming a capital loss. The maximum to deduct from these losses is $3,000, which is not enough to cancel out other taxes. That means you still have to make an IRS payment. When you play the game, you have to understand the consequences. Life’s a gamble!
11. My Accountant Made the Mistake, Not Me
No can do, my friend. Let’s say you outsource your work to an accountant. They’re pros, after all. But let’s not forget, they’re also human. If there was a mistake made, you would still be held responsible. “But it wasn’t me!” Once the accountant has filled out the paperwork, it’s your job to look over and review the work before filing your return {LINK to Tax Deductions: Here’s What Your Small Business Will Gain}. If you are audited, your accountant should help you with the process, but the IRS/CRA will focus on you, so be tread responsibly.
12. Help! The IRS/CRA is Knocking on My Door
Oooooh, bummer. There are some troublesome people worldwide like neo-Nazis, anti-maskers, and the clowns who call your phone or email you masquerading as the IRS/CRA. These scammers take more work to identify than the so-called Nigerian princes asking for thousands of dollars with the promise of returning millions. When you get a call from the IRS/CRA, you might find yourself in a situation where you may do anything to undo whatever issue is being fed to you. How do you identify these fraudsters?
If you receive a call or email demanding immediate payment using a prepaid debit card, gift card, or wire transfer, you can question or appeal the amount they say you owe. In fact, it’s encouraged to do so as it is your right as a taxpayer. Even if they threaten to have you arrested for not paying, or revoking your driver’s license, business licenses, or immigration status, hold your ground. The actual IRS contacts individuals through mail delivered by the USPS. Even in cases where the IRS/CRA were to call or knock on your door, they send out letters (notices) before doing so. In that way, the IRS is old school. Snail mail for the win!
Fact from Fiction
This year (and every year for that matter), let’s stay financially woke and full of namaste. Since we’ve debunked a handful of tax myths, we hope you’ll keep the actual facts in mind while filing. Keep an eye out for the scammers (shady sons of a snowman) and double-check your tax returns whether you hire an accountant or do it yourself. However, the most important rule we want to stress is that you need to pay your taxes on time! Reread the previous sentence and say it out loud. “I will pay my taxes on time!” After all, the downsides of taxation procrastination are enormous. Accruing those penalties and fees won’t do you any good. And don’t cheat by underreporting because the consequences can be hell! No one wants to have the IRS/CRA on their back (they are some heavy mofos).
This can be a lot to take in, and you might have more questions or concerns as you read through it. At Alchemy Accounting, we’ll answer all your tax myth questions and walk you through the trauma-inducing process. We also go beyond taxes to the realm of all things financial (so much fun). We suggest you take some time out to understand your financial well-being. It’s our job to keep you financially safe and sound — because just like a baby blanket, we’ve got you covered. So, snuggle up!