Tax Day for most Americans this year is April 18. Whether you owe money or are expecting a refund, filing a tax return with the IRS can be confusing -- especially if you've run across outdated suggestions or outright misinformation.
Below, learn about some of the biggest tax myths you might think are fact, but are actually fiction.
Myth 1: If you can't afford to pay your taxes, don't file a return
Some people are stuck owing the government money after they complete their tax returns. There are many reasons why this happens -- you didn't withhold enough on your W-4, you had income that wasn't subject to tax withholding (like selling shares) or there were big changes reflected on your tax return, like fewer dependents or deductions.
If you owe a tax payment, no matter the amount, you're required to file your taxes. However, you might have more options than you realize. If you don't have the cash to pay it, you should file your taxes and then contact the IRS. You might qualify for a payment plan or even an extension.
Myth 2: For married couples, filing separately is better than jointly
If you thought you'd be saving money by filing separately from your spouse, think again. Married filing jointly qualifies you for certain credits and deductions that your married friends who file separately might not qualify for. For instance, you're eligible for a larger standard deduction through a "married filing jointly" return, whereas filing separately means you can't take certain tax deductions that could give you significant relief, like the Earned Income Tax Credit and the Child and Dependent Care Tax Credit. Filing jointly could put you in a lower tax bracket if you earn significantly more than your spouse, and you might also be eligible to deduct more in capital losses than if you were to file separately.
If you don't think you'll take advantage of any of the tax benefits of filing jointly -- which is rare -- you could then consider filing separately. Some benefits include safeguarding against being responsible for your spouse's financials, or being able to deduct significant medical expenses. Consider preparing your taxes both ways -- jointly and separately -- to see which scenario gives you the biggest tax breaks.
Myth 3: If you don't have income, there's no need to file
Some believe that students and retirees don't need to file taxes, usually because income for these groups tends to be very low. But low-income earners aren't generally exempt from filing.
If you didn't get all the stimulus payments you were due last year, you may need to file a return to claim a recovery rebate credit.
The good news is, if you earn below a certain threshold or you've hit a specific age bracket, you might qualify for free tax help.
Myth 4: Making mistakes on your return will destroy your credit
Filing your taxes is important. Your credit score is also important. But a mistake on your tax return isn't going to demolish your credit rating. Credit score calculations are separate and tax liens are excluded from your credit report.
That said, not paying your taxes could still impact your credit score: For instance, if you don't pay your taxes on time and rack up penalty charges and fees, you may not be able to stay current on other bills. Falling behind on those payments could cause your credit score to drop.
Myth 5: State filing is optional
While filing federal taxes is required for all, the majority of taxpayers will also be required to file state taxes. Only a handful of states don't require you to file a state tax return:
- South Dakota
New Hampshire also does not tax earned wages.
Myth 6: Filing an extension means you can pay your tax bill later
If you need more time to get some outstanding paperwork in order, you can file an extension with the IRS. But for the most part, you're still required to pay the IRS by April 18, 2022. If you don't, you might face penalties, late fees and interest charges until you do.
It might be difficult to guess how much you owe if you haven't completed a return, but you can estimate this figure and make that payment while still preparing an official tax filing. If you don't need the extra time to file, you should complete your return by Tax Day. But if you're missing key documents to complete your return, you can complete a file extension form. If you do get an extension to file, you have until Oct. 15 to complete your return.
Myth 7: Your tax withholdings cannot be changed
There's a chance you haven't changed your tax withholdings -- or the amount of money your employer withholds from your paycheck to pay taxes -- since you got hired at your current job. Checking your W-4 withholdings could end up saving you a hefty tax bill, since you'll ensure that the right amount of taxes are being withheld throughout the year.
Even if you checked your withholdings last year, you may want to give them a look again. There's a chance you're paying too little to the government. This means that, come tax time, you might owe the IRS a large tax bill, or notice your return has seriously decreased. By checking your withholdings, you'll know how much you're paying in taxes, as well as if you're on the hook for paying taxes on Tax Day.
Myth 8: Self-employed or side-hustle income is tax-free
If you earn cash from a freelance gig, you'll need to report that on your taxes. Even if you didn't get a W-2 from your side hustle employer, the government needs to know how much money you took home last year through every revenue stream you have, including cash transactions. And, starting in 2022, income earned over $600 through digital payment apps like Paypal and Venmo will be reported to the IRS for next year's taxes.
Income from your freelance gig can both help and hurt your taxes. You might spend more time filing your taxes and you may even end up paying self-employment tax, but there are some credits and deductions you could qualify for. Self-employed people can deduct some of their home or vehicle expenses if they're used for business. You might also be able to claim educational expenses and health insurance costs if your day job doesn't cover those for you.