In written form, the tax code could make an encyclopedia set blush. With so many codes occupying so much shelf space, no wonder we are confused at times trying to determine what is a fact and what is a myth.
With that in mind, here are some commonly held tax beliefs that have no authenticity. Watch out for these; even the IRS does not want you to pay more taxes than what you legally owe.
Myth – I can stop filing once I reach a certain age
While it may be true that a person retiring on Social Security as their sole income likely will not have a filing requirement, there is no age at which one can legally stop filing. Return filing is based on income, not age. Even a person on Social Security may have to file and pay tax if they have other income sources, like a taxable pension, IRA distributions, or investment income. If so, a portion of your Social Security may be taxable as well.
Myth – I’m a student; I don’t have to pay taxes
Students are not exempt from filing and taxation, assuming they have earned income. Many students will take up summer jobs and claim “exempt” (from tax withholding) on their W4. This is fine, assuming the amount earned will be under the threshold for taxation.
For example, a single individual under age 65 was required to file a 2011 tax return if their earned income was over $9,500. Even if the amount earned was under that, a return should be filed to claim any tax withheld as a refund.
Myth – My child is over 19; I can’t claim him as a dependent
As long as your son or daughter is a full-time student as defined by the IRS, you can still claim them. Your child must be under age 24 and enrolled, in some part, during at least five calendar months, in the number of courses and or hours that the college considers “full-time.” If so, they can be claimed as your dependent as long as they meet the other requirements.
Myth – I can’t deduct state sales tax
Yes it’s a myth. The IRS allows you deduct actual sales tax you paid on food, clothing, medicine and most other purchases. Even the tax on a large purchase, like a vehicle, can be deducted as long as the rate is the same. The one stipulation? You must be able to itemize your deductions to make it worthwhile.
In lieu of sales tax, you can deduct state income tax. Use the amount that will yield a higher deduction. If deducting sales tax in combination with your other Schedule A itemized deductions is higher than your standard deduction, then this is the way to go.
Myth – Now that I’m married, I have to file with my spouse
The IRS doesn’t want to get involved in your marriage, so they have left this one up to you. You can choose to file together, or you can opt to use the filing status Married Filing Separate.
The advantage to filing separate? Perhaps you want to make a clear distinction and be responsible only for your tax. This may be true if your spouse has previous tax debts or owes other federal or state agencies. The IRS does have programs however (Injured Spouse and Innocent Spouse) to shield the non-liable party.
At times, a separate filing may also result in less tax owed as a whole. For example, if you plan on itemizing your deductions because you both have deductions to claim on your Schedule A, then those collective deductions are subject to percentage limitations. But if you were to file separately, you likely would be able to get more of those deductions accounted for and overall pay less combined tax.
Another filing status that may be available even if you are married? Head of Household. If your spouse did not live with you during the last six months of the calendar year, and if you kept up a home for yourself and at least one other person for whom you can take an exemption for, then you can file Head of Household and receive a greater Standard Deduction.