It’s no surprise that there is a lot of confusion and misinformation surrounding the United States tax code. With deductions, credits, adjusted gross income, exemptions, who can possibly follow it all? Since there is so much to know about taxes and also an appetite for taxpayers to learn, many make assumptions about how they think the IRS tax code works and they turn out to be false.
Below are a few important myths that all taxpayers at every age should be aware of:
1. A taxpayer can audit-proof their tax return
This is a major myth.
The IRS estimates that they will be over $300 billion tax dollars left on the street which is owed. Sadly for the IRS, they will not be able to audit every single tax return. Only about 1% of all tax returns get audited each year. Keep in mind the more money one earns and reports on their returns the more likely they are in getting a call from the IRS in the form of an audit.
2. A tax audit = scary IRS men in glasses at your doorstep
A major myth.
The IRS would like to keep the audit process as easy and painless as possible. Of the approximately 1,500,000 individual income tax returns examined (audited) in fiscal 2012, only 25% were examined in the "field," as the IRS puts it. The rest were conducted through correspondence.
However, it is worth noting that when businesses are audited, they are way more likely to get a visit from the IRS in person than not. Of the over 32,000 corporation income tax returns examined in fiscal 2012 (1.6% of total corporation tax returns filed), over 95% were examined in the field. Furthermore, 100% of estate tax returns that are audited are audited in the field as well. Go figure!
3. The home office tax myth
A common one is that by running a home-based business, you can deduct all expenses related to your residence. It is true that many expenses are allowed; for example, you can claim someof your home maintenance and other homeownership costs as business deductions. So in other words, you may not take your entire home as a home office deduction. The IRS has implemented a new $1,500 flat home office deduction to keep it simple for those that qualify. IRS publication 587 has all the details.
4. Woo-Hoo! As soon as I retiree I will be tax free!
This is a major myth I have heard before. There are a myriad of benefits to retirement, but leaving the workforce and entering your nest egg years doesn't necessarily free you from all the requirements of paying your taxes. In some cases even your social security benefits may even be taxed. Here is the skinny. Chances are once you retire you will fall into a lower tax bracket. Keep this in mind; many financial experts will suggest that a retiree will want at minimum 65% of your pre-retirement income in retirement to live comfortably. Some ways to combat the tax exposure one may face in their golden years is to set up a Roth IRA. There are many tax advantages in doing so. With a Roth IRA (as opposed to a traditional IRA) one may pay their taxes upfront rather than when they withdraw. Keep in mind that you may be subject to required minimum distributions laws come the age of 70.5. You can face tax penalties up to 50% of the amount you withdraw if you fail to take the minimum amount required from your retirement account each year.
More about Jordan Niefeld:
Jordan works for Gerstle Rosen & Goldenberg, P.A., which has maintained its reputation for excellence and client satisfaction in the areas of accounting, auditing, taxation, divorce and fraud forensic, business consulting, governmental, not-for-profit, litigation support, other real estate and construction accounting, as well as federal, state and local governmental accounting, auditing, and consulting services.\
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