With tax season in full swing, every friend and family member seems to have a different opinion about how to best deal with the IRS. But don’t believe everything you hear. Guard yourself against bad advice to avoid costly tax mistakes.
From deducting your home office expenses to claiming your pet as a dependent, here are five tax myths you shouldn’t believe.
1. If you can’t afford your taxes, it’s better not to file at all
If you’re working hard to repay student loans or other debt, you might have little left over to pay your taxes. But are you better off not filing at all?
The truth: If you don’t file your tax return and pay what you owe, you risk incurring penalties. “These penalties can get up to 25% of the taxes owed,” said Claudia Moncarz, who works as a tax attorney and partner at Moncarz Law Firm.
What to do next: If you can’t afford to pay your full tax bill now, there are other options.
First, ensure your tax bill is as small as possible by checking that you’ve claimed all possible deductions. For example, if you’re repaying student loans, you can deduct a maximum of $2,500 for the interest you paid last year, as long as your modified adjusted gross income is less than $80,000 ($165,000 if you file jointly).
After deducting what you can, file your tax return even if you can’t pay immediately.
“Depending on how much you owe, you can do a streamlined installment agreement,” said Moncarz. The IRS offers three different payment plans that could help you afford your dues.
If your tax bill is so big that paying it would cause significant financial losses, you might even be eligible for a payment date extension. Learn more about the eligibility requirements and application process for a payment extension.
2. A 401(k) is always the best option, regardless of your tax bracket
Because 401(k) contributions are taken directly out of your paycheck with pretax dollars, it’s a popular way to save for retirement. However, it’s not the only way.
The truth: Depending on your tax bracket, a Roth IRA might be more beneficial.
What to do next: If you’re looking to make the most out of tax time as you save for retirement, chances are you’ve been funding a 401(k). However, a Roth IRA might be a good alternative to consider, especially if you’re in the early stages of your career and still in a lower tax bracket.
“Many millennials starting out in the workforce will likely be in a lower tax bracket than when they are older and bringing home a larger paycheck,” said Andrew Thrasher, a portfolio manager for the wealth management firm Financial Enhancement Group.
Why does that matter? A Roth IRA is a retirement account where you invest contributions after taxes have been taken out. You won’t pay taxes on the distributions from a Roth IRA when you’re older. If you expect to be in a higher tax bracket at that time, making contributions now when you’re in a lower bracket might make sense.
There’s one caveat: If your employer offers a 401(k) match, Thrasher recommended funding it to get the employer match and then using a Roth IRA after.
3. You can deduct all your home office expenses
One of the most common tax myths revolves around home office costs. If you work from home, can you deduct your family’s phone or internet bills?
The truth: You can deduct legitimate business expenses, but you need proof in case of an audit.
What to do next: “If you often work from home, you are probably using some of your home internet or phone service,” said Josh Zimmelman, owner of Westwood Tax & Consulting. These are expenses you can claim.
“But,” said Zimmelman, “you can’t deduct your entire home phone bill on the taxes. You can deduct a portion of the bill, but you’ll need to keep detailed records of phone calls or computer use in order to calculate and prove what percentage was used for business.”
In essence, keep the receipts when claiming a home office deduction.
Some spending will be considered shared. For example, maybe only 20% of your phone calls were for business. “If you try to deduct unrelated home costs as business expenses, you might get flagged for an audit,” said Zimmelman.
“For example, just because you’re eating lunch at home while you work doesn’t mean you can write off that new kitchen remodel,” he added.
4. You can deduct your moving expenses
While moving expenses used to be deductible in some cases, times have changed.
The truth: The new tax reform bill that was signed into law in December removed this deduction for most people in the 2018 tax year and beyond. You can still deduct some moving expenses under certain circumstances, however.
What to do next: “Moving expenses are no longer deductible for anyone except members of the armed forces on active duty,” said Zimmelman. “But for 2017, you still might be able to deduct some moving expenses if you moved for a new job.”
Here are the criteria to claim this deduction for the 2017 tax year:
- Your move was due to a new job.
- Your new workplace was a certain distance from your old home.
- You worked full time in your new job for at least 39 weeks within the first year of moving.
5. You can claim your pet as a dependent
Your pet is part of the family, so can you claim Fido on your taxes?
The truth: While there are some cases where pet expenses can be deducted, claiming the family pet as a dependent is not one of them.
What to do next: There are a few cases where the IRS will let you deduct some pet expenses. If your pet is a guide or service animal, you can deduct some of the costs associated with your pet as medical expenses.
You can also deduct pet expenses in special cases, such as if you have a guard dog or use cats for pest control at your small business. Not every case qualifies, but if you’ve kept strong records, an accountant should be able to tell you whether the IRS is likely to consider your pet deductible.