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.
- “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.
- “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.
- “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.
- “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.
- “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.
- “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.
- “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.
- “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.
- “Income from my hobby can’t be taxable.” Have we mentioned enough that if it’s income it’s taxable?
- “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.