3 popular tax myths that can cost you money and nerves
The tax season was officially opened on January 27 - and now taxpayers may experience a familiar sense of anxiety: about 1 out of 3 Americans say they are worried about preparing their taxes, writes USA Today.
Tax anxiety is higher among young Americans, according to a study that found that more than 40% of Generation Z representatives (born after 2000) experience tax anxiety, compared with less than 30% of Generation X (born from 1960 to 1979). The reason may be related to life experience, since Generation X - taxpayers aged 40 to 55 years - filed returns much longer.
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.
“The big confusion around tax returns is due to a general lack of understanding of how taxes work,” says Dana Marino, financial lawyer for Credit Karma. “This was evident in our last survey, where we found that more than half of taxpayers do not understand where their tax returns come from.”
If the taxpayer does not understand that tax refunds are money that they have already paid to the state, this can do much harm. In essence, repayments are an interest-free loan to the US government due to taxpayers. According to some experts, although a tax refund may give a chance to catch up on accounts or buy something special, some consumers would be better off adjusting their deductions to avoid overpaying taxes.
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 credit rating is important, but people may not understand what is connected with this,” says Matt Sotir, financial specialist at Equitable Advisors. “There is nothing irrational in their expectation that this will affect the situation, but the security deposit of the tax return has been excluded from credit ratings.”
This change occurred in 2018 when three national credit bureaus - Experian, TransUnion and Equifax - removed all tax deductions or debts owed to the IRS from their credit reports due to studies indicating problems with accuracy.
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 at the IRS,” says 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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