When it comes to taxes, myths abound. And it's no surprise. Like the idea of coming up against Bigfoot or fearing your plane going down in the Bermuda Triangle, the notion of tangling with the IRS is a pretty scary concept. It doesn't help that taxes are complicated, which makes it hard to sort fact from fiction.
But you'd be smart to start sorting because when you believe a myth, it can end up hurting you. And doesn't doing your taxes hurt enough without you making things worse?
So if you're looking to improve your filing experience this year, here are a handful of tax myths that quite a few people fall for, according to tax experts.
1. Your work clothes are tax-deductible. Theresa Shea, a tax and accounting professor at Widener University in Chester, Pennsylvania, as well as a certified public accountant, says she has had quite a few clients come into her office believing that any type of work clothing is deductible.
"Some clothing is tax-deductible," Shea says. "Most is not. The only type of clothing for which one may take a deduction is clothing that is specifically required by your employer and is not suitable to wear outside of work."
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To preserve the uniqueness of their island paradise, Hawaii since 2004 has had an "Exceptional Tree" tax allowance. Landowners can deduct up to $3,000 from their income for expenses such as pruning and fertilization for any tree designated as rare, big, old or a combination thereof. That's per tree. Top-bracket earners taxed at the state's highest rate (11 percent) would save $330 via the deduction. The work must be done by a certified arborist, and the deduction can be claimed only every third year. Hawaii has had a list of "Exceptional Trees" since 1975, and there are now estimated to be more than a thousand thus designated.
Maine legislators tax anyone who deals in their official state fruit-blueberries, at the rate of 1.5 cents per pound. The resulting revenues-more than $1.6 million to state coffers in the fiscal year that ended in June 2013-are used to promote the crop and agricultural research.
The state also taxes harvesters and processors of hard-shell clams (known in the state as mahogany quahogs) at $1.25 a bushel, but state revenues for that are much lower.
Alabama is the last in the union to tax a deck of cards as if it were a "vice," like alcohol and tobacco. Taxing decks of cards, associated with gambling, was once fairly common, but most states have since set up separate control boards to regulate liquor and tobacco, and have let the cards slide.
But in Alabama, you'll still pay a 10 cent sales tax on any pack of cards you purchase. Retailers also have to pay $2 to the state each year for the privilege of selling playing cards.
Virginia levies a 50-cent excise tax on every lamb or sheep sold in the state. Both the Maine and Virginia taxes are examples of checkoff programs that collect taxes from an industry to fund promotional campaigns for the products. National commodity checkoff programs, authorized by the U.S. Department of Agriculture, have brought you campaigns such as "Beef: It's What's for Dinner" and "Got Milk?" But the Virginia program is extremely modest by comparison, having collected only $9,000 in fiscal year 2013. The funds go to the Virginia Sheep Industry Board, which spends them largely on predator control.
In 2013, in part to meet federal pollution-control mandates, Maryland legislators enacted fees on property owners in Baltimore and nine other Maryland counties, aimed at curbing storm water runoff. The fees were meant to fund programs to improve the water quality of the Chesapeake Bay, the largest marine estuary in the U.S. Sounds simple enough, but the way Maryland legislators wrote the law has led to an angry backlash in some corners against this so-called “rain tax.” One way localities calculate the tax is by measuring how much of a landowner’s tract is "impervious" to precipitation seeping into the ground. So the more you've developed it with buildings, driveways, tennis courts and the like, the less it will absorb and the more you pay. That's how the tax is being implemented (through aerial and satellite photos) in Montgomery County, a heavily developed suburb of Washington, and many landowners are up in arms. New Maryland Gov. Larry Hogan, a Republican, campaigned against this tax in his winning 2014 campaign and has introduced legislation to repeal it, though it’s not clear that will fly with Democratic state legislators. Money still needs to be raised to satisfy the federal pollution mandates, but the methods may change.
Kansas is among a bevy of jurisdictions that allows sale of lower-alcohol beer (the term of art is “cereal malt beverage”) in convenience and grocery stores. But Kansas also taxes “3.2” beer differently -- and there lies the rub. At a liquor store, all products, including, say, a conventional six-pack of Budweiser (with 5 percent alcohol by volume), are taxed at a special rate of 8 percent. At the convenience store down the street, however, ordinary sales tax is levied on the lower-alcohol, cereal malt beverage bottle of Bud. That often ends up being more than the 8 percent alcohol tax. In Pomona, Kansas, for example, the effective rate on the weaker beer would be 9.7 percent. Go figure.
When it comes to taxation, the rule is generally the stronger the booze, the higher the tax (that's why Kansas's beer tax scheme is an anomaly). California follows that curve, but at 100 proof, you better be ready to pay through the nose. Distilled spirits are taxed at $3.30 a gallon if below 100 proof, or 50 percent alcohol. Go over that, like with Bacardi 151, and the tax doubles to $6.60. Maryland also notes the 100 proof point, but it only adds 1.5 cents per proof, per gallon to the relatively modest liquor tax of $1.50 per gallon, taking the Bacardi 151 to $2.27 per gallon.
Entertainment venues pay a business tax to Nevada ranging from 5 percent to 10 percent on admissions fees (and food, drink and merchandise sales) whenever there’s live entertainment going on. There are exemptions, however, including this one, for businesses that provide "instrumental or vocal music, which may or may not be supplemented with commentary by the musicians, in a restaurant, lounge or similar area if such music does not routinely rise to the volume that interferes with casual conversation and if such music would not generally cause patrons to watch as well as listen." So your piano player can play “Feelings” softly and even crack a few jokes, tax-free, for your business. Just make sure they're not funny enough to attract attention.
Want to own a plush or fuel-thirsty ride? That’ll cost you extra in New Jersey. Cars that cost $45,000 or more or have a combined EPA fuel-mileage average of 19 or below pay an additional 0.4 percent on top of New Jersey’s 7 percent sales tax.
In New Mexico, making it to 100 years has a payoff beyond the chance that Willard Scott will wish you a happy birthday: You don’t have to pay state income tax anymore. If you’ve been physically present in the state for at least six months and a resident of the state on the last day of the year, and you’re not someone’s dependent, you’re eligible. You’ll still need to file, and there are some complications if you’re married and your spouse doesn’t qualify.
She recalls a client who once came in with a pile of receipts for new suits and dry cleaning, believing everything was deductible because his new job at a casino required him to wear a suit every day. When
Shea informed him that it wasn't all tax-deductible, he stormed out of her office.
2. You can estimate your numbers since you can always file an amended tax return later. There is some truth here. You can file an amended tax return if you learn that you made a mistake on your taxes.
But relying too heavily on that strategy, and believing that it's perfectly fine to estimate because of the ability to amend, is a big mistake, says Eric Green, a tax attorney and partner at Green & Sklarz, a law firm in Stamford, Connecticut.
Because in the technical sense, if you estimate your numbers, Green says, "the reality here is that the taxpayer just filed a false return, a return they know is false, which is technically a crime."
Furthermore, Green says the likelihood that you'll actually file an amendment later is slim. Odds are, he says, you'll forget about it.
"At least until an IRS exam is triggered," he adds. "If numbers are missing, then file it and tell the IRS it contains estimates, and make sure the actual correct return gets filed."
3. 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, according to Jordan Niefeld, a certified public accountant and certified financial planner based in Miami.
Niefeld was a tax CPA for eight years and says that many clients believed that if they filed a six-month extension on their taxes on Oct. 15 instead of the standard April 15, no harm, no foul, from a financial perspective. But you are hurting yourself, Niefeld warns.
"You may file on Oct.15, but the clock on the interest started on April 15," Niefeld says.
In other words, extensions are fine if you need the time to get your taxes together, but not as a way to save money.
Granted, if you find $10 in the street, and you pocket it, realistically, the IRS will never know, although, yes, technically you should report it. But if you're earning money, and you don't report it, that's a serious no-no. (Most tax attorneys would probably come up with a more technical term, like a "serious infraction.")
Andrew Oswalt, a tax analyst for the tax-preparation software provider, TaxAct, says this myth often trips up people who are making money on the side, say by driving once a week for a ride-sharing service like Uber.
"Even if you have a full-time job as a software engineer, botanical chemist or auto repair mechanic, you're still considered self-employed by the IRS for purposes of your side job," Oswalt says.
So assuming you made more than $600 in any given job, your employer will send you a Form 1099-MISC, Owalt says, and the money on that form will be subject to self-employment taxes. But on the bright side, he says, you may be able to deduct expenses related to that side job.
5. 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 and they may even wonder if they would have been better off not getting that raise or promotion. Not so fast, says Benjamin Sullivan, an enrolled agent and certified financial planner with Palisades Hudson Financial Group in Scarsdale, New York.
RELATED: Important tax dates to know
Important tax dates to know
5 myths about taxes
January 15, 2016: Those who are self-employed or have fourth-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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April 18, 2016: Individual tax returns are due for the 2015 tax year
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April 18, 2016: Requests for an extension on filling out your taxes must be filed by this date
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April 18, 2016: Those who are self-employed or have first-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
(Photo via Alamy)
April 18, 2016: This date is also the deadline to make a contribution to an IRA account for 2015
(Photo by Garry L., Shutterstock)
June 15, 2016: Those who are self-employed or have second-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
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September 15, 2016: Those who are self-employed or have second-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
(Photo via Shutterstock)
October 17, 2016: 2015 tax returns that received an extension are due by this date
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October 17, 2016: Today is the last chance to recharacterize a traditional IRA that was converted to a Roth IRA during 2015
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January 15, 2017: Those who are self-employed or have fourth-quarter income that requires payment for quarterly estimated taxes must have them postmarked by this date
(Photo by Pascal Broze via Getty Images)
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"The pain isn't as bad as some people think," Sullivan says. "Taxpayers sometimes mistakenly believe that receiving additional income can result in all of their income being taxed in a higher tax bracket.
However, only the income exceeding the tax bracket threshold is taxed at the higher rate."
Sullivan has an example that may offer more clarity. "A married taxpayer earning $500,000 of ordinary income would be in the highest tax bracket, which is 39.6 percent in 2015, but only the portion exceeding $464,850 would be taxed at that rate," he says. "In other words, the first $464,850 is still taxed at lower rates."
But do yourself a favor and don't share that "problem" with your friends in a lower tax bracket. You will be mocked.
Whether you drive for Lyft full-time or part-time, you’re now enjoying the pay, perks, and prerogatives of being self-employed—from setting your own hours to building customer relations. With the onset of tax season, you face a new business challenge: filing your taxes in a way that minimizes your tax liability. Follow these tips on how to use your Lyft 1099 to complete your tax return and maximize your tax deductions.