Chances are, you don't spend your free time reading up on taxes, so when it comes to getting educated on IRS matters, you may be inclined to just believe the various things you hear. But there's a lot of misinformation about taxes all over the internet, and if you buy into the wrong myths, you could wind up making some very costly mistakes. Here are a few common misconceptions that could really hurt you.
1. Side income doesn't need to be reported
The gig economy is booming these days, with millions of workers earning a side income on top of their regular salary. If that sounds like you, don't assume you get to keep all of the money you earn on the side. If you're paid as an independent contractor so that taxes aren't taken out of your wages as you earn them, you'll need to make estimated quarterly tax payments on that income to avoid IRS penalties later on.
At the same time, you must report any side income you bring home to the IRS when you file your tax return. If you earn at least $600 from the same company in the course of a year, it should issue you a 1099 form summarizing your wages. Now, you may be inclined to file away that form in a drawer somewhere and forget about it, but you should know that every time you get a 1099, the IRS gets a copy as well, and if you fail to report that income, you could land in serious hot water.
2. Itemizing no longer makes sense across the board
Ever since the Tax Cuts and Jobs Act went into effect, the standard deduction became much more valuable. For the 2019 tax year (which are the taxes you're filing this April), the standard deduction is worth:
- $12,200 if you're single or married filing separately
- $18,350 for heads of household
- $24,400 if you're married filing jointly
Because these numbers are so high, it's easy to assume that itemizing on your tax return doesn't make sense. But before you make that decision, run the numbers to see how they shake out.
Imagine you're single and paid $8,000 in mortgage interest last year, can claim a full $10,000 SALT deduction, and have $2,000 in charitable contributions to deduct. At that point, you can itemize to the tune of $20,000, thereby exempting that much of your income from taxes -- as opposed to limiting yourself to $12,200 worth.
3. A huge refund is a great thing to get
Many tax filers celebrate getting a large refund, and while that scenario may be preferable to owing the IRS money, it's hardly one to be thrilled with. When you get a giant refund, it means you overpaid your taxes the previous year and gave the government an interest-free loan in the process. And that's not something to feel good about.
One big misconception about tax refunds is that they're the same thing as free money. But they're not -- all a tax refund constitutes is the money from your income you should've collected up front. If you're getting a huge refund this year, and you've gotten multi-thousand-dollar refunds in the past, it may be time to adjust your withholding to collect more of that money up front. Doing so could help your cash flow improve, or help you avoid having to rack up debt when your budget gets stretched.
The more you learn about the tax code, the better positioned you'll be to avoid falling victim to bad advice. Steer clear of the above myths so you don't inadvertently cost yourself money, whether in the form of penalties on unreported earnings, lost savings, or delayed income.