5 Costly Tax Myths That Need To Stop Now!

It should surprise no one that there are myths about income taxes. The US tax code is over 4 million words long and subject to constant change and, therefore, confusion.

We want to help people avoid costly mistakes and debunk five tax myths:

1)      Married Filing Separate Is  a Viable Option

 

Yes, there are circumstances in which a married couple will save money on their income taxes by filing separately. If it is beneficial, a married couple should file separately. A good tax accountant can figure this out for you.

But 95% of married couple are better off filing  jointly. The married rate is a much lower tax rate than the married filing separate (MFS) rate. Yet the concept of MFS continues to be voiced as though it’s truly serious and viable option.

 

2)      Head Of Household Status Only Applies To Single Parents

 

Not True! There are several examples in which others might be eligible to file as Head Of Household.

You could be providing support for someone who is not your child. Examples such as a grandchild, sister or brother, a grandparent, or a parent   would allow you to file Head Of Household.

You can also be married but still be eligible to file as Head Of Household.  A key rule is that you lived apart from your spouse for at least six months. But there are four other rules to follow. You may have to provide supporting documentation to IRS.  Work with someone who understands these rules.

 

3)      Avoid Home Office Deduction Because It’s A “Red Flag”

 

 Many people have worried needlessly for years about taking the home office deduction. Perhaps at one time this was an area of concern. But, today, one in five Americans work from their home. A ‘real office’ at home is common today and the IRS rules today reflect that.

The key rules here are regular and exclusive use and principal place of business for the home office.

An informed tax professional really should be able to help you to take this deduction without fretting over “red flags”.

 

4)      Non-Cash Contributions Over $500 Means An Automatic Audit

 

The IRS, without question, has tightened the rules regarding charitable contributions because of alleged abuses in the past, But as long as you file the proper forms, have the proper documentation, use reasonable amounts, and make proper disclosures on the tax return, you should not be afraid to take any non-cash contributions.

 

5)      After Age 55,  A House Can Be Sold Tax Free

 

Well that was true… in 1996! A change under the Taxpayer Relief Act of 1997 made this tax break obsolete. Yet this tax myth continues to circulate.

Today, homes can only be sold tax-free if the profit is less than $500,000 for a married couple ($250,000 for a single person)  AND you lived in it for two of the last five years. Also watch out for a Medicare Tax on certain home sales under the new health care law. Do yourself a favor and talk to an accountant  who understands the nuance of real estate.

 

John J. Kasperek, Enrolled Agent, has been in practice since 1987. He likes to help clients to  separate the wheat from the chaff when it comes to income tax issues for their business or household.