Source: sxc.hu Photo: gossamerLL

Source: sxc.hu Photo: gossamerLL

We have a complex tax code that can be quite confusing. Trying to tote up credits and deductions, and working on getting an advantage, can be time consuming work. It is not surprising, therefore, that a number of assumptions about tax filing turn out to be incorrect. And, while some filing assumptions (such as the myth that using the provided address label will mark you out for an audit) are relatively harmless, there are some false assumptions that could end up costing you. Before you give in to assumptions about tax filing, do a little research — and consult with a trusted tax professional. Here are 5 tax filing assumptions that could result in large costs:

1. Tax Filing is Voluntary

This is a nice thought. The idea that paying income taxes is voluntary floats around out there, and comes from IRS statements and a Supreme Court case from 1960 that state that our tax system is based upon “voluntary assessment and payment…” Unfortunately for would-be tax avoiders, the courts and the IRS have been at pains to explain that it’s the assessment that is voluntary, not the payment. The reason that the assessment is voluntary is because tax payers are responsible for figuring out the amount of their obligations and then offering (volunteering) that information to the government. Of course, this is why there are audits — they are meant to double check that your voluntary assessment is accurate.

If you don’t pay your taxes, you are subject to penalties. There is a penalty for failure to file (and it’s heftier than the failure to pay penalty), and there are interest charges on the amount that you owe. If you aren’t careful, the fees and penalties can add up, costing you quite a bit.

2. No 1099? No Need to Report

Many of those who earn income from a side business, home business or contract work believe that if there is no 1099-MISC submitted for their income, there is no need to report it. There are a couple considerations here. Sometimes, someone who hires you will send a 1099 to the government, but forget to send you a copy. That makes catching your perfidy fairly simple. Others think that since your employer doesn’t have to send in a 1099 when s/he pays you less than $600 in a year, you don’t have to report that income. Not true. All income is taxable. No matter how little you make, and whether or not someone sends in the 1099. If you are audited and the discrepancy is discovered, it could mean back taxes and penalties.

3. A Canceled Check Works as Documentation for Donations

When you give to charity, whether it’s cash or goods, you need to have some sort of documentation, whether it’s a receipt or a canceled check if you want to itemize for the deduction. For donations of under $250, this works just fine. However, once you reach that $250 mark, you need a donor acknowledgment letter specifying how much you gave, and/or describing the property you donated. If you received goods or services from the charity in exchange, that has to be in the letter as well. And this includes donations and tithes given to your church. My congregation issues a yearly letter that itemizes donations, and clearly states that the only benefits I receive are intangible, and associated with my faith. You can see Publication 526 from the IRS for more information. Claim something you shouldn’t, and you could owe that amount — plus interest.

4. Unless My Parents Live with Me, I Can’t Claim Them as Dependents

Many people provide support for their parents, even though they don’t live with them. If you aren’t claiming the dependent-care exemption for parents you support, you could be missing out on tax savings, paying more than you should. There are some caveats, though. You and your siblings must pay at least 50% of their living expenses, and only one of you can claim the exemption each year. Some families rotate who gets the exemption, while others just provide it to the sibling that offers the most day to day support (even if it isn’t the most financial support). You do have to provide at least 10% of total support if you want to take the exemption, though. Check IRS Publication 501, or consult a tax professional for more information.

5. If You’re Married, It’s Best to File Jointly

Most people just assume that if they are married they should file jointly. However, there are some situations that may warrant filing separately. When the kids leave home, and the dependent exemption is no longer available, or if there has been a big change in income, couples may actually do better with separate filings. Sometimes, these savings are more apparent with state taxes. See if your tax professional will run a comparison between the two options, including state and federal taxes. You could save money, using it for you, rather than handing it over to the government.

Bottom Line: It’s best to rethink your assumptions about filing your taxes, and see if you could save a little more — or at least avoid common pitfalls that could cost you a great deal.

Miranda

Miranda

Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.