Taxes and tax filings are confusing to most Americans. One study shows that 48% have no idea what tax bracket they are in, and 90% of Americans don’t know how many tax brackets there are. (The most common answer was ten – the correct answer is seven).
And this year, from January to August, the IRS sent out “math error” notices to more than 11 million taxpayers.
The majority of people think the tax system is complex and unfair.
And it’s not getting any better with this year’s stimulus package, including more than 300 changes to the IRS code.
With all that confusion, it is no wonder that Americans have incorrect myths about taxes. Here are a few.
#1 – Being Married is Always a Tax Benefit
The IRS offers you many advantages for filing jointly with your spouse. For example, married joint-filers get the largest standard deductions allowing them to deduct a significant amount of their income.
Married filers also receive higher income thresholds for many taxes and deductions. And they may qualify for multiple tax credits like the Earned Income Tax Credit, Child and Dependent Care Tax Credit, and more.
But there are times when being an unmarried couple is more tax advantageous.
Student Loans: You can deduct up to $2,500 of the interest paid on your student loan, subject to specific IRS qualifications. But this is $2,500 per return, not per person. As example, two unmarried individuals may be able to deduct $2,500 each, whereas, married couples filing jointly can only deduct a total of $2,500. And married persons filing separately do not qualify for the deductions at all.
SALT Deduction:
The IRS allows you to deduct four types of non-business taxes:
- State, local, and foreign income taxes
- State and local general sales taxes
- State and local real estate taxes, and
- State and local personal property taxes
These are commonly referred to as SALT (State and Local Taxes) deductions.
There are rules, but the main point is that the maximum amount you can deduct is $10,000 on your return. Two single filers can deduct up to $10,000 per return. But a married couple filing jointly is limited to $10,000 for that return. And, if the married couple files separately, they are limited to a $5,000 deduction per return.
While you might think reaching the limit would be difficult, remember this includes the hefty real estate tax bill you pay each year. So, an unmarried couple with two high incomes and a large house might easily qualify for the maximum deduction.
Additional Medicare Tax: The Affordable Care Act (ACA) added an extra Medicare tax of 0.9% for individuals making more than $200,000. The threshold for married couples filing jointly is $250,000 and only $125,000 per spouse if they file separately.
This additional tax penalizes married couples the same way the SALT deductions and the student loan interest rate deductions do. Here, an unmarried couple each earning $199,000 per year will pay no additional Medicare tax. However, a married couple filing jointly in which both spouses combined earn more than $250,000 (an average of $125,00 for each spouse), will have the additional Medicare tax.
#2 – Cash Payments for Services are Not Taxable
Incredibly, many people believe this is true, and the IRS will quickly point out it is not. Customers can pay you for your services or products in several ways. They are almost always classified as taxable income to you.
Unless specifically exempted by law, any income you receive is generally taxable, whether paid in money, property, other services, especially cash. Royalties, cryptocurrency payments and commercial bartering are all income and subject to reporting and taxing requirements. Even a check you receive this year, but do not cash or deposit until next year, is considered income this year.
#3 – No Sales Tax on Internet Purchases
This may have been true in the past, but not anymore. In 2018, in the Supreme Court case, South Dakota v. Wayfair Inc., the Court ruled that states can charge sales tax on internet purchases and expanded retailers’ responsibilities to collect sales tax on those out-of-state purchases.
Today 45 states and the District of Columbia charge sales tax. The states with no sales tax (yet) are Alaska, Delaware, New Hampshire, Montana, and Oregon.
Suppose you are buying through a “marketplace nexus” like Amazon. In that case, they are required to collect the applicable taxes and comply with the tax laws in all states where they do business.
But before 2018, businesses followed the long-standing rule from the 1992 Supreme Court case, Quill Corp. v. North Dakota, where retailers were only required to collect sales tax on out-of-state sales only if the company had a physical presence (nexus) in the state.
The Court in Wayfair cited technology advances, and today sales tax is due on purchases where the company has a nexus OR has a threshold amount of sales in that state.
As a former sales and use tax auditor, I found many companies were unaware of use tax regulations and often caught off guard. One company even owed 50,000 in use tax because they didn’t pay sales tax when they purchased office supplies off the internet.
But even if you buy a product on the internet with no sales tax, you may still have to pay taxes to your home state through a use tax. States can charge you a use tax on items you bought elsewhere with no sales tax if that item would have sales tax in your home state.
Additionally, if you purchased an item off the internet and don’t pay your state rate, you are responsible for the difference. For example, if you live in California that has a base sales tax rate of 7.25%, but you only pay Maryland’s 6% rate, you are responsible for remitting the difference of 1.25% to California.
And don’t think internet shopping will save you. Online retailers have reporting requirements to notify you that you must report any pay applicable use tax on your purchase. Many states will even ask you about use tax on your personal income tax return.
#4 – My Out-of-State LLC has No State Taxes – So Neither Do I
Business owners form LLCs in states with no state income tax for various reasons like privacy. Unfortunately, many believe they can avoid any state income tax in their home state. This is not the case and often leads to substantial penalties and other problems.
Simply opening a foreign LLC will not reduce your home state tax burden. Suppose you have an online business that you run from your house. In that case, the income generated is likely subject to tax obligations in your home state. See our article on Where Should You Form Your LLC? for more information.
#5 – I Can Deduct Gas and Mileage
This is a simple rule but one of the most misunderstood. The IRS will allow you to deduct mileage or actual car expenses – but not both.
Beginning on January 1, 2022, the standard mileage rates for the use of a car, van, pickups or panel trucks will be:
- 58.5 cents per mile driven for business use. This is an increase of 2.5 cents from 2021,
- 18 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, and
- 14 cents per mile driven in service of charitable organizations.
You may choose to deduct 58.5 cents per mile driven, or all of your actual costs, such as gas, oil changes, car washes, repairs, etc. multiplied by your business use of your car.
For example, suppose you have $5,000 in car repairs and you use your vehicle 50% of the time for business, you may deduct $2,500 ($5,000 times 50%) OR the number of miles driven for business times 58.5 cents. In most cases, you may choose the higher deduction. Also, be aware that you must keep all receipts for actual costs.
#6 – I Work at Home, So I Can Deduct My Mortgage Interest Payments.
More and more people are working from home due to the gig economy and COVID. And people working at home want to take advantage of the IRS home deductions.
The home office deduction is available if you are self-employed or an independent contractor working from home. The two main requirements are that you need to use a portion of your home exclusively to conduct business regularly, and your home must be your principal place of business.
There are rules as to what are direct expenses or indirect expenses. Mortgage interest is an indirect expense, so you may deduct a proportional amount according to the regulations. And it is important to remember, that while a proportional amount of the property tax and mortgage interest may be deducted, principal payments on your mortgage are not deductible at all.
Unfortunately, these deductions were suspended for W-2 employees from 2018 through 2025 by the Tax Cuts and Jobs Acts. So, if you are a W-2 employee, even if you are working from home, you are not qualified for the home office deduction.
#7 – I Save Money By Doing My Own Taxes
This is rarely true. Qualified CPAs have years of experience to help you. A few reasons to use a qualified CPA are:
Mistakes are Expensive: The tax code is complicated, and mistakes can be costly.
Save Money: A good CPA can find deductions you don’t know to look for or credits you might have missed.
Save Time: The IRS says it will take the average person 20 hours to do the average tax return. How much is your time worth to you?
We Answer Your Questions: If you call the IRS, you might be on hold for hours and not get your questions answered. We can answer your question immediately.
It’s About Tax Planning – Not Just Filing: At CE Accounting, we don’t just file forms and crunch numbers. We analyze your business and your business goals to minimize your tax obligations.
We help your business grow and thrive.
We are in the Washington DC metro area and have clients locally and nationwide.
Call today and let us show you your next best steps for minimizing your taxes.
“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”