As the April 15 tax filing deadline approaches, it's important to separate fact from fiction when it comes to preparing your returns. "Tax laws are often summarized for [the] sake of quickly explaining a potential benefit—or conflict," says Andy Phillips, Director of H&R Block’s Tax Institute. "When details are omitted, it’s easy to misinterpret law or consider the advice of a trusted friend versus taking time to do firsthand research." Blindly following someone else’s bad tax advice could cost you precious time and money. Here are some of the top tax myths to be aware of this season.
"I can file my tax return with the details from my last paycheck stub."
The figures listed on your last paycheck stub may be close to what will be released on your W-2, but it’s not guaranteed that the numbers are always right. Plus, as Phillips explains, this is technically not allowed. "Your last pay stub is not considered an IRS-recognized document for filing. It’s common for calculations to be slightly off throughout the year and not be accounted for until end of year. Payments such as bonuses and commissions can easily be forgotten, and no one enjoys the process of filing an amended return."
Phillips' advice: Wait for your employer-prepared W-2. He adds that you should "be wary of return preparers who advertise paystub filing, which is against the rules." The employer should have issued your W-2 by Jan. 31st at the latest.
"Being unemployed means I don’t have to pay taxes."
If you receive any form of unemployment benefits either from the city, state, or federal level, then that’s considered income. All income should be reported on your tax return. Unemployment benefits paid are typically reported with a Form 1099-G. This form functions similarly as a W-2, outlining how much you were paid and if taxes were withheld.
"Any money that I give counts as a charitable contribution."
Of course, giving without the expectation of repayment is an admirable gesture. However, Phillips notes that only charitable gifts and donations made to IRS-qualified tax-exempt institutions are tax-deductible. Typically, a receipt is provided when a tax-deductible gift is received. If you recently made a donation and are unsure if your donation was made to a qualifying organization, use the Tax Exempt Organization Search Tool located on the IRS website.
"A tax filing extension gives me more time to pay my balance due."
Unfortunately, an extension of time to file does not give you more time to pay. Phillips says that "you should try your best to pay your estimated balance due when you request an extension." If you can’t pay, filing a tax return is the first crucial step to determine your eligibility to enroll in an IRS-approved installment payment plan.
As Phillips explains, neglecting to file on time subjects you to a failure-to-pay penalty, which starts at 5% of your unpaid taxes per month, up to five months, or a minimum of $485 if the return is 60 days or more late. The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty won’t exceed 25% of your unpaid taxes.
By steering clear of these common tax myths, you can avoid costly mistakes and headaches this filing season. Consult a qualified tax professional if you have any doubts or complex tax situations.
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