The 8 Biggest Tax Myths You Should Know

Several tax myths have been circulating lately, some of which can cost you a lot of money in penalties and lost opportunities if you act based on hearsay rather than seeking the advice of a tax professional. To set the record straight, we've compiled a round-up of some of the most common tax myths together with the information you need to know.

Myth #1: Filing Taxes Is Voluntary

Some people have been telling others that filing taxes in the United States is voluntary, based on the phrase “the tax system is voluntary” in a previous Form 1040 instruction book. The term “voluntary” in IRS publications refers to the fact that U.S. taxpayers calculate their own taxes. Filing a tax return is not optional!

The obligations to pay income taxes and file tax returns apply to anyone under 65 who earns more than $12,550 in a given tax year or $14,250 for taxpayers 65 and above, an obligation which is clearly explained in the U.S. Income Tax Code (also known as the Internal Revenue Code). 

Not filing taxes can have several serious and costly consequences, including:

• Penalties and interest for underpayment

• Missed opportunities for claiming deductions and tax credits

• Jail time for tax evasion and tax fraud

If you don't file taxes, the IRS can create a “substitute for return” on your behalf using the information they have from your bank and employer. Waiting for the IRS to create a substitute return is definitely not in your best interests, because you won't enjoy the benefit of any tax credits or deductions and will end up paying more money than you need to. 

If you have any missing tax returns, catch up on your unfiled tax returns with the help of an IRS Enrolled Agent as soon as you can. The penalties will be far less severe if you file back returns proactively rather than waiting for the IRS to come after you.

Myth #2: Students Don't Need to File Taxes

A student who earns more than $12,550 must file a tax return, even if they are still classified as a dependent. When a student earns less than the minimum amount for filing, it could still be in their best interest to file a tax return, as they may be eligible for the Earned Income Tax Credit or may be due a tax refund if they paid income taxes during the previous tax year. The student’s parents may also be eligible for the Child Tax Credit if their working child files a return.

Myth #3: You Can Choose Your Tax Filing Status

There are five tax filing status options when you fill out your tax return:

• Single filer

• Married filing jointly

• Married filing separately

• Head of household

• Qualifying widow(er)

When it comes time to choose, the applicable filing status is whichever one applied on December 31 of the previous tax year. If you got married or divorced part-way through the previous year, you will select the filing status that applied at the end of the tax year and that status will apply to the entire year. 

The exception to this rule is the death of a spouse during the previous tax year. In that case, you can still file as married filing jointly for the tax year in question and as a qualifying widow(er) for the two tax years that follow to get the maximum benefit.

A Note about Married Filing Jointly vs Married Filing Separately

If you are married, you can file together with your spouse or each file a separate tax return. If you file separately, only one spouse will claim any dependent children that are shared by both spouses. Please note that an unemployed spouse can't be claimed as a dependent for tax purposes. Pets also can't be claimed as dependents, no matter how much you love them!

Myth #4: Remote Employees Can Claim the Home Office Deduction

Before 2017, employees who worked from home could claim the home office deduction. However, the Tax Cuts and Jobs Act of 2017 removed this provision for the years 2018-2025, limiting the home office deduction to self-employed individuals who:

• Use their home office as the exclusive place of trade or business

• Meet clients, customers, and patients exclusively at their home office

• Store product samples or inventory in their home regularly for wholesale or retail sales

• Use part of their home for rental use

• Use part of their home as a daycare facility

• Use a separate structure not attached to the home regularly as the exclusive place of trade or business

If you are employed and complete all or part of your work at home, your employer can (but is not obligated to) reimburse you for expenses incurred. However, even if you are not reimbursed, you can’t claim your home office as a tax deduction on your return as an employee.

Myth #5: Gifts Are Counted as Taxable Income

Under the federal tax code, gifts are not counted as income for the purpose of federal income taxes. While an individual who gives a gift over $16,000 (for 2022) or $17,000 (for 2023) must fill out Form 709 and possibly pay tax on the gift, you won't pay any income taxes on the gift that you received.

Myth #6: Cryptocurrency and Cash Income Isn’t Taxable

Tax laws apply to cryptocurrency and cash just as they do to income received into your bank account via ACH deposits. Failing to report cryptocurrency and cash income could result in an understatement of income, penalties, and interest. 

If you trade in cash or cryptocurrencies or receive cash tips as part of restaurant work, you must declare all of this income on your return and pay tax on the applicable portion. If you aren’t sure how to declare and pay tax on tips, consult with a restaurant accounting professional.

Myth #7: Filing for an Extension Means You Have Longer to Pay Any Taxes Owed

Requesting an extension to file your income tax return gives you an extra six months to get the paperwork in; it doesn't give you an extension to pay your taxes. If you intend to ask for an extension to file your return, pay your estimated tax amount by April 31 to avoid penalties and interest on the outstanding amount.

Myth #8: Your Tax Preparer Is Liable for Mistakes on Your Tax Return

During tax season, many individuals, small businesses, and corporations rely on tax professionals to help them prepare their returns. However, while your small business accountant has a more in-depth knowledge of the tax code and the most up-to-date rules regarding deductions and tax credits, you are still held legally liable for the information on your return.

When meeting with a tax preparer or small business accountant, make sure that you take all of your financial statements and receipts for any business expenses you intend to deduct. Before signing off on the return, you should also check the return thoroughly to make sure that all of the details are correct. 

If in Doubt, Ask a Tax Professional

Tax myths are plentiful on the web but can end up costing you dearly in the form of lost tax refund opportunities, penalties, interest, and even jail time. 

Before filing a tax return (or not filing a tax return) based on hearsay, consult with a tax professional about the most current tax laws and which deductions and tax credits might apply to you. We have tax professionals available who specialize in helping taxpayers nationwide. Not only will you avoid unnecessary tax debt, penalties, and criminal prosecution, you might receive a larger refund!