Saturday, January 29, 2011

5 Tax Myths Everyone Should Know

Don't you love a huge refund at income tax time? As it turns out, a big tax refund may make you feel good but it's not actually good for you. It means that way more than necessary was being withheld from your paycheck or, if you're self-employed, that your quarterly tax payments were much too large. 
That's fine for the government because they're essentially getting an interest-free loan in the meantime. But most of us have better uses for our money, like paying off credit cards, making investments or having more cash for routine expenses. So next time you hear someone brag about their big tax refund, you'll know they've bought into one of the oldest tax myths around.
Employees who are getting large refunds should go to IRS Publication 919  for an IRS booklet that shows how to avoid too much withholding; the section you need to read starts on page four. If you're self-employed, have your accountant recalculate your quarterly taxes to prevent overpayment. The notion that large refunds are good is but one of the many enduring tax myths. Here are five others you should be familiar with.
Myth 1: People who file electronically are more likely to be audited.
About 95 million taxpayers e-filed their 2009 income tax returns. In fact, the majority of returns are now filed electronically. Pretty soon, e-filing will probably be mandatory, so people have naturally begun to worry about the new system being more prone to audits. Yet, the IRS audit rate remains steady at less than 2% of all returns. The main audit triggers are the same as always, things like filing late, high self-employment income and math errors.
Myth 2: Paying taxes is voluntary.
Saying that taxes are voluntary or illegal is a favorite argument of tax protesters to justify not filing a return. But to the IRS, "voluntary" simply means you get to do all the tax calculations yourself. We're all required by law to pay taxes. So, if you're thinking of becoming a tax protester, be aware that your chances of avoiding taxes are slim to none - and that you'll probably also be liable for late-payment penalties.
Myth 3: Taxes in America are way too high.
Our income tax system may not always be comprehensible or fair, but Americans don't pay the highest taxes by a long shot. Whereas our highest tax bracket for individuals in the United States is currently 35%, individuals can be taxed at 50% or more in Austria, Belgium, Cuba, Denmark, Japan, The Netherlands and the United Kingdom. The top bracket in Sweden is almost 60%.
Myth 4: Filing for an extension increases your chance of an audit.
Most tax preparers say they haven't seen any link between filing for an extension and getting audited. If anything, filing for an extension reduces your risk of an audit because you buy yourself six extra months to make sure you get your taxes done right. If there aren't any math errors or other red flags, the IRS will be more than likely to pass you over for an audit.
Myth 5: All certified public accountants (CPAs) are income tax experts.
Just because you see "CPA" after someone's name doesn't necessarily mean he or she is an expert tax preparer. Although the CPA curriculum includes extensive income tax courses, not all CPAs go into tax prep or keep up on income tax laws. If you're in the market for a tax preparer and you're looking at CPAs, be sure they've actually got plenty of tax prep experience. 
Tax Myths AboundTo say that the tax laws in America are voluminous and confusing is probably an understatement, so it's no surprise there are so many tax myths. The more aware of these myths you are, the more control you'll have over your own destiny as a taxpayer.