Each time tax season approaches, people start talking about ways to get a bigger return or precautions to take in order to avoid an audit. While it makes sense to try to learn as much as you can about filing your taxes effectively, you also need to protect yourself. There's a lot of misinformation out there, and you can't always believe what you hear or read.
It's extremely important to file your taxes correctly. Doing so ensures you get the refund you deserve and also keeps you from getting in trouble with the IRS. You may feel like hiring a tax professional is the only way to have peace of mind when filing your taxes, but it's entirely possible to take care of them yourself.
To help you out, we're debunking four common myths about filing a personal tax return. Knowing the truth could help you avoid a big headache.
Filing an Extension Also Gets You a Payment Extension
Many people end up scrambling to file their taxes by the April 15 deadline. If you find yourself in this situation, you have an option to file for an extension. This simply means you're given more time to get your taxes in order and submit them. However, if you know you're going to owe taxes instead of receiving a return, this extension doesn't lengthen the time you have to pay the IRS.
On the surface, this may sound a bit confusing. If you get an extension and file your taxes a few months later than the deadline, aren't you automatically getting an extension on your repayment? Not exactly. After April 15, you'll start incurring a failure-to-pay fee each month. Think of this as interest on the amount you owe. This penalty is typically 0.5%.
The last thing you want is to owe the IRS more than you already do. That's why it's advisable to prepare your taxes ahead of time and avoid filing an extension. You should also consider calculating what you'll owe using the IRS tax table. That way you can put enough money aside leading up to tax season.
After You've Received Your Return, You Can't Get Audited
Getting audited by the IRS won't ever happen to you, right? Hopefully it won't, but a lot of people think that and end up having their taxes scrutinized. According to an IRS data report, 1 million tax returns were audited in 2017 alone. While an audit isn't the end of the world, it can definitely be nerve-wracking.
It seems logical that once you've filed your taxes and received your return, you're exempt from the IRS taking a closer look. However, this isn't how it works at all. In fact, getting a refund only means your taxes have been received and accepted by the IRS. Whether you get audited or not is determined down the road.
After filing your taxes and receiving your refund, your return will be checked digitally against a model. This check will result in what's referred to as a Discrimination Information Function (DIF) score, which is based on inaccuracies on your taxes. Returns with high scores are reviewed by an IRS agent to determine whether an audit is necessary.
It could take the IRS several months to start the audit process. In some cases, an audit may even occur years after a return was filed.
Married Couples are Required to File Jointly
It's common knowledge that your tax situation changes once you get married. However, many people believe that tying the knot means you and your spouse are required to file a joint return. This isn't true. There are no laws that dictate how you must file. You still have the freedom to file separately if you'd like.
Now, this information shouldn't dissuade you from filing jointly with your spouse. The fact remains that getting married typically results in a better tax situation for couples. For the most part, marriage results in reduced tax rates and additional benefits. Things like earned income credits and claiming children as dependents will boost your return.
One exception is when a married couple both have extremely high incomes. Filing jointly could move them into a higher tax bracket and a marriage penalty may occur. If you feel this could happen to you, talk to a tax professional to find out if filing separately is the better option.
College Students Don't Have to File Taxes
Some people think that pursuing a college degree means getting a break from filing an income tax return. For the most part, this is untrue. Attending a university doesn't make you exempt from filing your taxes, but there are some conditions to consider. A few situations could make a student exempt.
According to Investopedia, a single person under the age of 65 only has to file taxes if they make over $12,000 a year. If you're a student and only working part-time for extra cash, not having to worry about filing may sound nice. However, you won't get a refund if you don't file, so it actually makes sense to go ahead and do it. Furthermore, you may qualify for much-needed education credits. You could also claim a student loan and get a larger return.
There are some other instances where a student can become exempt. For example, if your parents claim you as a dependent, there's a chance you won't have to file. It all depends on the amount of earned income you received and if you collected money through investments. This may be more trouble than it's worth. A good rule of thumb is to plan on filing your taxes if you're working at all while attending college.
Make Tax Returns Easy on Yourself
Filing your taxes may seem stressful, but the online services available today take a lot of the hassle out of the process. The primary thing you need to do is educate yourself on the dos and don'ts of filing a return and avoid common myths like those discussed above.
If you've got further questions or simply want to learn more about taxes, debt, and the IRS, we can help. Check out more articles on personal taxes today.