Taxes can be confusing. No surprise there, they are complex and the rules are constantly changing! Because of that confusion and complexity there are some stubborn myths about taxes – and some are even sort of accurate in some circumstances – making it hard to sort out what’s true and what’s not. Take our Tax Myth Quiz and see how well you know Uncle Sam’s rules.
1. I filled out my W-4 (withholding form) when I started my job 5 years ago, so I don’t need to worry about it.
This is false! You should review your W-4 at least annually. If you have changes in your life (married, divorced, new dependent, additional income, etc) you’ll want to update when those happen too. The IRS provides tables to give employers guidance on the amount of taxes to withhold from your paycheck based on the information in the W-4 (the withholding form) that you complete when hired (or update later on).
2. I am a student. I don’t have to pay taxes.
This can actually be true or false! If you are a student and still claimed as a dependent on someone else’s tax return (likely your parents), whether you have to file a return yourself or not depends on how much you earned. If you earned less than the IRS minimum, you may still want to file if your employer took out taxes in order to be eligible for a refund. Take a look at your W-2 and the IRS website to see if you need to file.
3. Sometimes It’s better to NOT make more money to avoid paying more in taxes because of a higher tax bracket.
This is false. Our tax system is based on “marginal tax brackets” which means if your income goes up and you move up to the next tax bracket, your marginal tax rate is the tax rate applied to the next additional dollar of income you earn. It doesn’t apply to every dollar you earned in a year. It’s only the incremental amount above the tax bracket limits. You can read more here about marginal tax rates and how they work.
4. A mistake on your taxes impacts your credit score.
This is false. A mistake on your taxes is just that, a mistake on your taxes. It has no impact on your credit score. The IRS will usually notify you by mail of the error and it’s your responsibility to either respond with information that supports your return or file an amended return. If the correction means you owe more taxes, the IRS charges interest and penalties from the due date of your tax return until you pay what’s due. So the longer you wait to fix a mistake, the more expensive it can be. Not paying your taxes can result in a tax lien, which used to impact your credit score. But tax lien information was wrong so often that it isn’t included by the credit bureaus anymore. Read more here on what does impact your credit score.
5. If I file an extension, I have until October 15 to pay my taxes.
This is false! Many people get confused by this because you can file an extension to get more time to complete your filing, especially if you have complex taxes. However, this extension does not extend the time you have to pay the IRS. Any taxes you owe are due on April 15. If you’re filing an extension, you need to estimate what you’ll owe and pay that on April 15. And if you don’t pay on time, penalties and interest can begin to accrue.
6. If I have an internet business, I don’t have to pay taxes on that income.
This is false. Paying federal and state income taxes is required for every business, including those operated online. This myth probably comes from confusing income tax with sales taxes due for online business. Sales tax requirements do vary state by state. However, businesses of all types and all sizes (even a one person, online business) are required to pay federal and state income tax.
7. I don’t make enough money to get audited.
This is false. Getting selected for an audit has less to do with income and is more about “red flags” in your returns. Things like math errors, failing to report all your income, claiming too many itemized deductions (charitable donations, losses, etc) and business expenses, having assets in a foreign country, and more can all contribute to getting flagged for an audit. If you claim the Earned Income Tax Credit (EITC) and/or the Child Tax Credit, the IRS is likely looking at those returns a little closer to confirm eligibility since those two credits have been claimed fraudulently so often.