When it comes to tax time there’s an abundance of tax myths and tax realities. You don’t want to fall for these top tax myths because it just might cost you some cold hard cash. To better prepare yourself for this tax season make sure to avoid these top 5 tax myths
1. You Don’t Pay Tax if You’re a Student
This is a common myth amongst college students who don’t think they pay any tax because they are a student. College students don’t typically earn much income when they are in school and therefore don’t pay any federal income tax. However, they are still subject to social security and Medicare tax withholdings. In short, college students typically don’t pay tax not because they are a student but because they don’t earn enough income.
2. Social Security is Non-Taxable Income
You paid medicare and social security tax all your life and it’s time to retire. You start collecting social security and it comes time to file your tax return. Unexpectedly, you owe a little bit of tax – but why? Well that’s because social security is considered taxable income. But don’t fret! The maximum taxable base amount of your Social security is 85%. For most taxpayers this portion is a lot smaller due to their low-income upon retirement. So is social security taxable? Yes… but not 100%.
3. Tax Rates are the Same across all the States and Cities
Tax rates are not uniform across all states and cities in the United States. Each state has the authority to set its own tax rates, resulting in significant variations from one jurisdiction to another. Additionally, local governments, such as cities and counties, can impose their own sales tax on top of the state rate, further adding to the complexity. As a result, consumers and businesses must navigate a patchwork of tax rates, which can make tax compliance challenging, especially for businesses that operate across multiple states.
Understanding the specific tax rates in each state and locality is essential to ensure accurate tax collection and reporting, and it often requires the assistance of tax professionals and sophisticated tax software to navigate this intricacy effectively.
For instance, Texas sales tax, which is levied at the state level, currently stands at 6.25%. However, when local sales taxes are factored in, the combined tax rate can vary significantly depending on the city or county in which the purchase is made, ranging from 6.25% to over 8.25%. This illustrates how tax rates can differ substantially even within a single state like Texas.
4. Gifts to Charity are Tax Deductible
It might be true that gifts to charity are tax-deductible, but for most taxpayers that isn’t the case. That’s because charitable contributions are an itemized deduction taken on Schedule A of form 1040. In 2018 it will be more difficult to claim itemized deductions because the standard deduction is almost doubling for both individuals and married filers. This means that roughly 90% of taxpayers will claim the standard deduction over claiming itemized deductions in 2018. So when someone says you can deduct charitable contributions on your tax return – think again!
5. It’s Good to Get a Big Tax Refund
Another tax myth is that it is good a get a sizeable tax refund. Although it’s nice to get a big tax refund at the end of the year it doesn’t necessarily mean you’re winning at taxes. Getting a big refund means you’re giving the government too much money during the year and they are paying you back on an interest free loan. That money is better off in your pocket and going towards your monthly expenses or your savings. If you’re getting back a few thousand at the end of the year then consider changing your tax withholdings to break even at the end of the year.
Bonus Myth: Taxes are Complicated
For some, taxes can be extremely complicated. If you own a business, have a side hustle, live and work in different states, have a trust or investments, bought a home, sold a home, or hit the lottery, then your taxes might be a little complicated. But if you’re like most Americans and most of your income comes from wages then your taxes are pretty straight-forward. There are many options to file your federal and state tax returns for free – just go to your state’s website to learn more.
For example, if you live in New York and earn less than $66,000 per year then you can file your taxes for free: just follow this link (click here to file your taxes for free). Additionally, there are some websites that offer free tax services such as Credit Karma, just be sure that you are using a reliable site before you start entering your confidential, personal information.