Urban Myths of Tax
by Bob Williams
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Just about everyone likes a good story. And that’s especially so when the stories are true. But one category of storytelling carries no such guarantee. Called urban myths by some, urban legends by others, these stories can cloak sometimes outlandish claims with a veil of plausibility.
Anyone who’s watched the popular TV show “Mythbusters” knows that most of the urban legends they examine wind up being “busted” or debunked. Not that all urban myths are untrue, mind you. But when it comes to your income tax return, the truth can be less than obvious at times.
So in order to help you make the right choices on your return, here are some of our Urban Myths of Tax.
I can deduct my rent from my federal taxes. If you own a business, you can deduct the rent you pay as a business expense. But if your rent is for your home or apartment, that’s not the case. Some states do allow deducting rent from their state taxes, but there’s no provision for that on the federal side.
Do I have to file a schedule C? My business is really just a hobby, right? Well, that depends. The hobby-versus-business bit isn’t as clear as you may think. The IRS uses some questions to see if your free-time pursuit is more of a business than a pastime: Do you carry on the activity in a businesslike manner? Do the time and effort you put into the activity indicate that you intend to make it profitable? Do you depend on the income from the activity for your livelihood?
If your hobby showed a profit in three of the past five years, that’s another indicator you’ve got a business. And of course, if the IRS concludes you do have a business rather than just a hobby, you will have to file a Schedule C, and you might have to pay self-employment tax.
Money earned online isn’t taxable. Ask the folks at Amazon.com about this one. We’re not sure how this myth got started. Income is income, and as such, it’s taxable. Online income is no different than if you sold products out of a storefront on Main Street: taxable.
Once you retire, you become tax-free. That certainly would give us something to look forward to in our later years. However, it’s not true. Granted, you can receive up to $25,000 in Social Security benefits tax-free ($32,000 if you’re married filing jointly), but any income beyond that is fair game for the taxman. Any income other than Social Security payments are also taxable income, whether or not you take the government benefit.
If I do any work at home for my employer, I can write off my house payment as a home office. Not exactly. Form 8829, Office in Home, says that you can only deduct the portion of your home used exclusively and regularly for business purposes. A claim of 100 percent business use of a home will release the flying monkeys for an audit.
Filing an extension means you don’t owe anything until October 15. An extension gives you more time to file a return; it does not give you more time to pay any tax due. If you owe taxes, they’re due by April 15.
I got paid in cash for the job, so I don’t have to pay taxes on it. If it’s income – and just about everything is – it’s taxable. Whether you get paid in greenbacks or a check, it’s all the same. Report all income on your return.
Working in a state without state income tax means your paycheck is tax-free. Maybe not. The big question is: where do you live? If you live in that tax-free state, you win. But if you live in a state that has income tax while working in a tax-free state, you’ll still be taxed by your home state.
There are others tax myths, of course. But you get the picture. Don’t let popular misconceptions steer you wrong. Read our blogs here on 1040.com. Sign up for our email and Twitter feeds to get hints and timely reminders. And don’t forget, each of our federal forms has all the help you’ll need to do your taxes right and in hardly any time at all.
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