Common Tax Misconceptions

Tax code is so complicated it even confuses the experts. Last week, the Wall Street Journal posted an article revealing the truth behind 10 common tax misconceptions.

  1. “I’m filing an extension this year, so I don’t need to pay anything yet.”  An extension is just that – an extension. You still need to pay your taxes by April 17. If you don’t and step into a payment plan, you will be subject to interest and penalties.
  2. “I had a big loss in the stock market this year, so I won’t owe any income taxes.” The deduction of capital losses against ordinary income is limited to $3,000.
  3. “I traded some stocks and have a loss/didn’t make any money, so there’s no need to report those sales.”  All sales must be reported on your tax return. Your broker will provide you with a “cost basis,” which you must present to the IRS. Make sure you verify those numbers are correct as this is the first year brokers are required to report a cost basis.
  4. “I reinvested my dividends and didn’t receive them, so I don’t have to pay tax on them.” It’s income. You need to report it and pay the necessary taxes on them.
  5. “They paid me in cash and I don’t have to report it.” Same as #4. It’s income and must be reported. Even if you don’t get an 1099 from the payee, you are still required by law to report that money.
  6. “I’m too young/too old to have to pay taxes.” Whether you’re a dependent teen or recently deceased, if you earned income exceeding $5,700 in 2011, you must file. That’s right. Even if you’re dead, a family representative must file and pay on your behalf.
  7. “If I didn’t receive a document about it, it’s not taxable.” Not true. You are responsible for reporting and paying taxes on all income, even if to proper documents are never received.
  8. “Income earned in a foreign country is not taxable.” It’s income: it’s taxable. There are major penalties for not reporting foreign income earned or foreign financial accounts.
  9. “Income from my hobby can’t be taxable.” Have we mentioned enough that if it’s income it’s taxable?
  10. “The IRS doesn’t care about my state tax refund.” Paying taxes on last year’s refund is correcting an over-deduction from the previous year.

This article: 

Common Tax Misconceptions

Leave a reply