Six Common Myths Regarding Income Tax

By:  Isaac M O’Bannon, Managing Editor CPA Practice Advisor

While millions of American taxpayers wait for their W-2, 1099 and other important tax documents to arrive in the mail, their thoughts turn to the often-dreaded prospect of filing their 2014 tax returns.

With all the annual changes to the tax rules and its complexity, it’s not surprising that millions of Americans hire a paid preparer. After all, asking questions or searching the Web for answers often leads to more confusion and misconceptions, because when it comes to taxes, one standard answer usually does not fit all.

The National Association of Enrolled Agents, an organization of federally licensed tax professionals, has pointed out six frequently-encountered tax myths.

Myth 1: “I’m filing an extension this year, so I don’t need to pay anything yet.”

Fact: Tax extensions only extend the time you have left to file, and do not change the date on which you have to pay taxes owed. If you owe taxes and file an extension, you still have to pay the taxes owed by April 15, regardless of the extended deadline date. Otherwise, interest and penalties begin to stack up.

Myth 2: “I had a really big loss in the stock market this year, so I won’t owe any income taxes.”

Fact: Deduction of capital losses against ordinary income is limited to $3,000 per year. Also, whether you reinvest or receive dividends, they are income and are taxed as such.

Myth 3: “They paid me in cash, so I don’t have to report it.”

Fact: If it’s income, you must report it. You must always report income, regardless of whether it’s cash, tips, bonuses or dividends.

Myth 4: “I’m too young to have to pay taxes.”

Fact: Even dependents working part-time while in high school must file a tax return if they earned more than $6,200 in 2014, if they want to receive their refund or if their unearned income is more than $1,000.  There are numerous other situations that may lead to a dependent having to file a tax return. To be safe, consider consulting a licensed tax professional.

Myth 5: “Income earned outside the U.S. is not taxable.”

Fact: The operative word is “income,” which means it’s taxable. The IRS requires taxpayers to report all earned income, even if it’s earned abroad.

Myth 6: “Tax preparers only fill out forms that you can do yourself.”

Fact: Licensed preparers know the intricate (and constantly changing) tax laws, regulations and codes, and how they can be applied for your benefit to save you money. Enrolled agents receive IRS-approved annual continuing education, ensuring that they have the most up-to-date strategies to make sure you pay only what you owe and get any refunds you are due. Enrolled agents, CPAs and tax attorneys are also the only tax professionals who can represent taxpayers before the IRS.