3 Tax Hacks on TikTok That Could Cost You Money — Or Get You In Trouble With The IRS
Surprising numbers of people, especially young adults, turn to TikTok for financial advice. With tax season in full swing, many people listen to so-called experts on FinTok for ways to reduce their tax bill.
Check Out: A Look at Tax Filing Options and Costs
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GOBankingRates spoke to financial expert Matt Watson, founder of Origin Financial, an AI-powered platform that helps people manage their money. He shared this thoughts on why TikTok and other social media platforms may not offer the best advice, along with the three worst tax tips he’s heard this year (and what you can do differently).
Bad Tax Hack #1: Buy a Truck as a Business Expense
Watson recently saw a video where the TikTokker recommended buying a vehicle and using it as a business expense. The video explains that Section 179 of tax code allows business owners to write off the full amount of a vehicle as a business expenses, reducing your income and lowering your tax liability.
“Oftentimes, tax advice like this applies to a very small set of people,” Watson pointed out.
For starters, he said, “You have to have a business. It has to be a big enough business that you’re going to benefit from that deduction that you’re claiming. You can only deduct the percentage of the price that is actually utilized for business.”
Also, the vehicle must weigh at least 6,000 pounds to qualify. “If you look at the price of these types of vehicles, you’re looking at a six-figure vehicle. It’s very expensive,” he said.
Watson said that videos like this could encourage someone to buy a vehicle they can’t afford, only to realize they can’t legally deduct the cost at tax time.
Bad Tax Hack #2: Borrow Against Your Assets to Make Investments
Another video encouraged people to borrow against their home or life insurance policy to purchase assets or investments. The ultrawealthy, like Jeff Bezos, use this tax avoidance tactic to avoid selling stocks and facing capital gains tax on that sale. Instead, they use their stock portfolio as collateral to make purchases.
But, according to Watson, TikTokkers are encouraging people to borrow against their home to purchase stocks or speculative investments. “What that is doing, ultimately, is just increasing risk,” he said. “Risk tolerance should always be considered in the context of a total financial plan.”
Watson pointed out that the average person watching TikTok could leverage their homes or cars for investments in stocks or cryptocurrency and wind up underwater.
“This is an incredibly risky tax avoidance strategy that might make sense for millionaire experts in their fields. But for the average non-professional investor, it’s almost guaranteed that those watching this video will wind up underwater,” he said.
Bad Tax Hack #3: Get a Larger Tax Refund by Withholding More of Your Paycheck
If you owe a lot in taxes at the end of the year as a W-2 employee, you might want to adjust your withholding amount on your W4 to minimize your tax bill next year. Your withholding is the amount of payroll and FICA taxes your employer takes out of each paycheck.
However, if you are coming up even, with no gains or losses, when you file your taxes, or receiving a few hundred back, Watson said it doesn’t make sense to change your withholding.
“Giving money to the government just so that they give it back to you at the end of the year does not actually net you more money. It’s nonsensical. Yet people are going to adjust their W4s after watching this video for absolutely no reason whatsoever. Yes, they’ll get a larger tax refund, but at the expense of having that money in their account all year — potentially earning a higher return,” he said.
With interest rates in online, high-yield savings accounts hovering near or above 5% this year, you could hold onto that money and watch it grow.
“For folks who don’t have an emergency savings fund, we recommend three to six months of cash on hand in the event of losing a job or some other financial emergency. We would encourage you to create that emergency savings fund and take advantage of that 5% gain,” Watson said. “For those folks who do have an emergency fund, we recommend that you start taking advantage of tax-advantaged accounts with a 401(k).”
How to Separate Good Advice From Bad on Social Media
Watson mentioned that most of the financial advice on TikTok is designed to drive engagement. It might be shocking or inflammatory — or, at least, it’s designed to sound that way.
Before listening to internet advice, Watson said, investigate the credentials of the person sharing tips.
“Are they a Certified Financial Planner? Are they a Chartered Financial Analyst? Do they have some accreditation that that when they give advice, they have to follow rules that are set forth by the accreditation that they’re operating under?” Watson explained.
He noted that there are some good financial accounts out there. You should also look at their overall body of work online to determine their expertise. “Are they consistently speaking about finance, or are you following them for lifestyle tips or personal improvement?”
In general, Watson said, the best financial advice won’t be exciting or incendiary. “It’s not the sexy stuff,” he said. “It’s the nuts and bolts that will grow your money significantly over the long term.”
He said that investing in tax-advantaged accounts such as a 401(k) and health savings account (HSA) can put you on a path toward long-term financial growth. He also mentioned tax loss harvesting, where you sell underperforming stocks at a loss to offset capital gains tax on successful transactions. “That’s a really efficient way to avoid taxes on your investments,” he said.
Learn More: 4 Ways To Find Tax Deductions That Work For You in 2024
Ultimately, he said, look for safe, easy-to-follow tips to improve your finances over time, not tax hacks you find on TikTok.
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This article originally appeared on GOBankingRates.com: 3 Tax Hacks on TikTok That Could Cost You Money — Or Get You In Trouble With The IRS
