3 popular tax myths that can cost you money and nerves

Tax season officially opened on Jan. 27—and taxpayers may already be feeling that familiar feeling of anxiety: About 1 in 3 Americans say they're worried about preparing their taxes, writes USA Today.

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Tax anxiety is higher among younger Americans, according to a study that found that more than 40% of Generation Z (those born after 2000) experience tax anxiety, compared with less than 30% of Generation X (those born between 1960 and 1979). The reason may have something to do with life experience, as Generation X—taxpayers between the ages of 40 and 55—took significantly longer to file returns.

These fears are sparked by several common misconceptions that can harm taxpayers: increase their anxiety and even cost them money.

At the heart of the problem is a complex tax system, which annually costs Americans $ 200 billion in time and money spent on preparing their tax returns. This estimate excludes tax payments.

“A lot of the confusion around tax returns stems from a general lack of understanding of how taxes work,” says Dana Marino, a financial attorney at Credit Karma. “This was evident in our latest survey, where we found that more than half of taxpayers do not understand where their tax refunds are coming from.”

If a taxpayer doesn't understand that their tax refund is money they already paid to the government, it can be detrimental. The refunds are essentially an interest-free loan to the U.S. government, courtesy of taxpayers. While a tax refund may offer a chance to catch up on bills or buy something special, some consumers would be better off adjusting their withholdings to avoid overpaying in taxes, some experts say.

Here are some misconceptions that you need to urgently get rid of.

Myth 1: A Tax Error Will Affect Your Credit Rating

About a third of taxpayers mistakenly believe that a mistake in the tax return will damage the credit rating. This is stated in a recent Credit Karma Tax survey. But this is not so, say tax experts.

“Everyone understands that a credit score is important, but people may not understand what goes into it,” says Matt Sotir, a financial planner at Equitable Advisors. “There is nothing irrational about their expectation that this will have an impact, but tax return liens are excluded from credit scores.”

On the subject: A tax credit that millions of Americans don’t know about, missing out on the opportunity to get money

This change occurred in 2018 when three national credit bureaus—Experian, TransUnion and Equifax—removed all tax liens or debts owed to the IRS from credit reports due to studies indicating accuracy problems.

In other words, consumers should not worry too much about the fact that a mistake in their tax returns will affect their credit rating. Credit scores "are the best assumptions of credit bureaus about whether you will pay your bills on time, and this has nothing to do with paying states and federal taxes," adds Marino.

Myth 2: if you apply for a tax extension, you can pay the IRS until October 15

Last year, more than 1 in 10 taxpayers demanded a six-month extension to file taxes. A common misconception is that an extension gives you more time to pay in favor of the IRS, but it is not.

Typically, taxpayers request an extension if they need more time to collect documents or need to draw up complex taxes that require more time to prepare. But the IRS still expects you to pay any taxes due by April 15th, which taxpayers sometimes do not understand, say Luke and Matt Sotir, financial experts at Equitable Advisors.

“This does not change your tax liability to the IRS,” notes Luke Sotir.

And note: fines and interest may be charged if you do not pay the IRS before April 15, regardless of whether you filed for an extension.

On the subject: 26 things to do now if you want to file a tax return on time

Myth 3: you do not need to adjust taxes again

During the first full year of the new tax law, the IRS encouraged taxpayers to adjust their W-4 deductions with employers. But even if you checked everything last year, you still may have to make adjustments in 2020, especially if you have another income from work.

In fact, the IRS redesigned W-4 for 2020 and reports that taxpayers with more than one job, or households where both spouses have jobs, may need to increase the deduction amount. For example, earning extra income at a second job can increase your income and increase your tax burden. This puts you at risk of underpayments if you do not adjust your deductions.

Checking your retention at the beginning of 2020 can help you prepare for the tax year and avoid unpleasant surprises in April next year.

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