What are some common tax myths that people mistakenly think are true?
Many people may have heard rumors or friends mention some common tax myths -- things that sound too good to be true. Some of the most common myths are:
- If you work from home you can deduct your home office
- You can claim dependent exemptions (like your kids)
- You must itemize to claim charitable donations
- You can file your taxes on a postcard
- You’ve already paid taxes on your retirement distribution
- There’s no tax penalty for not having healthcare coverage
There’s been a lot of misinformation around some of these topics, while others are a little complex but get oversimplified as they’re shared, like a game of telephone. Let’s learn what the truth is behind each of these tax myths.
Myth #1 - Deducting your home office if you work from home
This deduction only applies to individuals who are self-employed. If you were employed through someone other than yourself, you can’t claim the home office deduction even if you did work from home. That may come as a surprise to many who have been working from home for months now, but it’s true.
Myth #2 - You can claim dependent exemptions
This tax myth used to be true, but that’s no longer the case. Personal exemptions for dependents ended in 2017 with the passage of the Tax Cuts and Jobs Act.
Myth #3 - You have to itemize to deduct charitable donations
This was the rule for the last tax season (2019) but this tax year (2020), it changed. You don’t have to itemize to take a charitable donation deduction when you file this year. Under the CARES Act, you can deduct up to $300 in charitable donations made to IRS-approved organizations when you take the standard deduction. If you do itemize, you get to claim all your charitable donations including the $300 as itemized deductions.
Myth #4 - I can file my taxes on a postcard
During the passage of the Tax Cuts and Jobs Act, there was a lot of talk about a new “postcard” tax return. Unfortunately, this isn’t the case. The form to which many referred to as a “postcard” is actually two pages, plus three schedules. Taxes are too complicated to file on something as small as a postcard.
Myth #5 - I’ve already paid my retirement distribution
Having withholdings on your retirement or IRA distributions doesn’t mean you already paid taxes on it. It’s a common misconception. The income and withholding still go on your tax return, to be added to other withholding and refundable credits. If you have enough withholding, you may get a tax refund. If that’s confusing, talk it over with a Tax Pro.
Myth #6 - There’s no tax penalty for not having healthcare coverage
Many people think the Affordable Care Act (often referred to as Obamacare) doesn’t matter since the penalty was removed. But the reality is that you still have to reconcile your advanced premium tax credit when you have insurance through your state’s Health Insurance Marketplace. Some states are now charging penalties if you don’t have health insurance. For people who get healthcare in the marketplace, they still get credits and MUST report them on their taxes. Not doing so could slow IRS processing, causing delays and triggering notices.