The tax code has always been complicated, and the 2018 overhaul brought about numerous changes that have made things even more complex.
The more educated you are about the tax code, the less likely you are to run into trouble. This isn’t to say that you should drop your weekend plans and instead spend hours combing through the IRS’s website. But you should read up on more recent changes that could impact your taxes, or consult a professional for help with tax planning and strategizing.
There’s a lot of misinformation floating around about taxes, but if you allow yourself to believe the following myths, you’ll be setting yourself up for disaster.
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1. “I don’t have to pay taxes on my side income”
An estimated 45 million Americans have a side hustle these days, and if you’re one of them, you’re probably enjoying that extra income on top of your regular paycheck. But just as you’re required to have taxes taken out of your salary, so too are you liable for taxes on the income you earn from that second gig.
Now many people who have a side hustle are employed in an independent contractor capacity, so if that’s the case for you, it means you won’t have taxes taken out of your earnings as you go. Rather, you’ll need to keep track of your income, report it to the IRS when you file your return, and pay estimated quarterly taxes on it along the way. Therefore, if you typically bring home $500 a month from a second gig, don’t assume that entire $500 is yours to spend. Rather, set some of that money aside for taxes, and then use that cash as you see fit.
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2. “Itemizing doesn’t pay anymore”
When you file your taxes, you get two choices: You can take the standard deduction as dictated by the IRS, or you can itemize your deductions instead. Currently, the standard deduction is $12,200 for single tax filers and $24,400 for married couples filing a joint return. Prior to the aforementioned tax overhaul, the standard deduction was $6,350 for single tax filers, and $12,700 for joint filers. Because today’s numbers are so much higher than they were in the past, an even smaller percentage of filers are likely to itemize – but that doesn’t mean it’s the wrong move for you.
If you pay a lot of mortgage interest, are liable for a high amount of state and local taxes, and give a lot to charity, then you may find that you’re entitled to deduct a sum that exceeds what the standard deduction allows for. The takeaway? Don’t assume itemizing is your best bet until you actually sit down and run the numbers.
3. “I don’t earn enough to get audited”
Though fewer than 1% of tax returns are audited each year, your chances of landing on that list are actually higher if you don’t report much of an income. Among tax returns filed in 2017, the audit rate for adjusted gross incomes between $25,000 and $499,999 ranged from 0.44% to 0.54% – meaning, that percentage of returns were flagged. But the audit rate for incomes between $25,000 and $49,999 was a bit higher at 0.69%.
Furthermore, if you report no income at all, there’s a much greater chance your return will be scrutinized. For returns filed in 2017 that reported no adjusted gross income, the audit rate was 2.04% – roughly four times the audit rate for incomes between $25,000 and $499,999. Therefore, if the income you’re planning to report is on the low side, make sure your numbers are legitimate.