Tax time can be a big stressor for a lot of people. One of the main reasons for this is because people may just not be very knowledgeable about the tax paying process, or how to fill out a tax return. There is a lot of information floating around out there on the web. Some is accurate, however a lot of this advice can be coming from people that don’t know what they are talking about. This can further confuse people into thinking false things. Here are several of the most common tax myths that should help you when tax seasons comes around.
Students Don’t Pay Income Tax
If you ask a college student if they have to pay income taxes, they will probably say no. While being a college student can come with its benefits, it does not exclude them from having to pay income taxes.
Many students may think they are exempt from paying taxes due to the fact they have limited income. While this may be the case for federal income taxes, students still have to pay other taxes. They are still subject to social security and Medicare tax withholdings.
At the end of the day, college students typically don’t pay taxes because they don’t make money. However, students still have to file a return, and pay certain taxes.
Getting a Big Tax Refund is Good
While getting a big tax refund can be exciting, it is not necessarily a good thing. Big income tax refund being a good thing is definitely one of the most common tax myths.
Receiving a big refund after filing means you are giving the government too much money during the year. This means that you are having more withheld each paycheck then you should be. Giving more to the government is basically an interest free loan. You are giving them free money to use for things, but they have to pay you back at the end of the year.
This money is absolutely more useful staying in your pocket. You can put this into your savings, or even invest it. Instead of just getting the money back after you file your return, you can be using this money throughout the year. Some refunds can be as large as $5,000. I’m sure you could have used that for things during the year instead. If you like getting a big check back from the government, then think about creating a budget or developing better savings habits.
If you are getting a large tax refund back, then consider changing your tax withholdings amount. Ideally, you should want to get $0 as a refund. This shows the right amount was taken out of your paychecks throughout the year.
You Don’t Have to Pay Taxes on Social Security Income
One of the biggest and most common tax myths is that you don’t have to pay taxes on social security income. After your entire life paying Medicare and Social Security taxes, you may believe this. However, you do owe a small amount of tax on your social security income.
This might not seem to make sense. The government is paying you, so why would you have to pay them back? Can’t they just withhold all the taxes from the social security checks? This is true, however social security income is taxable income. That being said, the maximum taxable base amount of your social security is 85%. So, while social security is taxable, the amount you could have to pay is minimum.
Donations and Gifts to Charity are Deductible
Some donations and gifts to charity count as deductions on your tax return. But for most taxpayers, this is not the case. The reason for this is because charitable gifts are an itemized deduction.
A little background on this – when you file your tax returns you can either take the standard deduction. This is basically a deduction amount set by tax regulation. The alternative is to itemize your deductions. Itemizing your deductions means that you list each of your deductions in hopes that it is more than the standard deduction.
In recent years, the standard deduction has grown considerably. In 2018, the standard deduction almost doubled for individuals and married filers.
This means that for most taxpayers, itemizing deductions will garner less tax savings. This is not the case if you made gifts that are larger than the standard deduction.
Taxes Are Complicated
While taxes can be complicated for some, if you are a normal American, filing your taxes is very straight forward. If most of your income comes from wages, then filing your tax return is a breeze.
This is not the same story for those who own a business, have a side hustle, or live and work in different states. Buying or selling a home can also create some intricacies to your tax return – for instance you may have to pay taxes when you sell your home.
Depending on your situation, filing your taxes will be easily. Thanks to some free online resources, you can even fill out your taxes by yourself, for free. Some of the best personal finance apps you need can assist you with filing your tax return.
Common Tax Myths – Summary
There is a lot to know when it comes to filing your taxes. However, there are a lot of myths out there regarding your income taxes. Here, we detailed some of the most common tax myths. Remember, students do have to pay taxes, getting a big refund is not good, social security income is taxable, charity donations are not always deductible, and lastly taxes are not always complicated.
If you need any help or have questions about your taxes, feel free to reach out to a CPA, tax accountant, or financial advisor.