What are some of the myths about taxes?
Myth #1: Filing an extension gives you extra time to pay.
The extension gives you extra time to prepare your taxes, but if you owe money, and you file six months later, it is more expensive than paying in April.
In other words, extensions are fine if you need the time to get your taxes together, but not as a way to save money.
Myth # 2: Making more money bumps you into a higher tax bracket.
People who are close to reaching a new tax bracket may suddenly be worried that because they're making more money, they're going to be hit with more taxes than ever. They may even wonder if they would have been better off not getting that raise or promotion. But only the income exceeding the tax bracket threshold is taxed at a higher rate.
Myth number #3: Home office deductions will result in an audit.
With home offices becoming increasingly prevalent, this one-time fact has become predominantly fiction. Although claiming a home office does increase scrutiny, they’ve become common enough that there’s no need to be afraid of claiming a legit deduction. The one thing to be wary of is making sure your claim actually falls within the IRS definition of a home office.
Myth #4: A large refund is a good refund.
Of course, you'd rather receive a check than write one. But letting the government use your hard-earned dollars interest-free, just so you can receive a big refund, isn't really a wise financial decision. A huge refund check is usually a sign that you paid too much over the year. You'd have been better off putting that extra money in a savings account where it could earn some interest.
Myth # 5: A refund anticipation loan is a great way to get my money fast.
A RAL is an interest-bearing short-term loan provided most often by a tax preparation company. It's based on the taxpayer's expected refund and subject to fees set by the lender. Some taxpayers choose the loans because they can receive their money in a few days rather than weeks. Plus, several larger tax preparation companies offer the convenience of getting your refund on a debit card.
But you might find yourself paying tax preparation fees, account fees and finance charges on your loan. There might also be fees associated with the debit card, such as charges for ATM withdrawals and balance inquiries.
All in all, if you want to enjoy your full tax refund, it's better to file electronically and have the money directly deposited into your bank account. You'll have your money almost as fast as with a refund anticipation loan, but without all those fees and interest.
Myth # 6: Once I retire, I’m tax free
There are a lot of benefits to retirement, but leaving the workforce and entering your golden years doesn’t necessarily free you from all the bonds of labor. Odds are you will still have income in retirement, and if the government is good at anything, it’s collecting taxes on income.
You can reduce your tax liability in retirement by establishing a Roth IRA instead of a traditional IRA, and paying your taxes upfront rather than when you withdraw. Whatever you do, keep in mind that if you take the miserly route and withdraw as little money as possible from your retirement accounts, 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.