The American Institute of Certified Public Accountants released the following list of 12 common misperceptions about federal taxes countered by a correct explanation of the rules.Myth No. 1:Taxpayers who take the automatic four-month extension instead of filing by April 15 are more likely to be audited.
Reality: There is no correlation between extending the return-filing deadline and getting audited.
Myth No. 2: Using the preprinted label on the return increases the chance of getting audited.
Reality:The label is used to speed up the processing of your return and does not affect the selection of returns for audit.
Myth No. 3:If you can't pay your tax, it's best not to file your return.
Reality:Willful failure to file a return is a federal crime. Taxpayers who can't pay all or part of the tax should file their returns and attach a completed Form 9465 requesting an installment payment plan from the IRS.
Myth No. 4: If you support your parents in a nursing home, you can't claim them as dependents because they don't live you.
Reality:Parents need not live with you for you to claim them as dependents. (Dependents who are not "relatives" under the tax law need to live with you, however.) Certain taxpayers supporting dependents may also qualify for the benefits of head-of-household filing.
Myth No. 5: Money received as a gift or inheritance is taxable.
Reality:Money or property received as a gift or inheritance is exempt from the federal income tax. Further, payment of the federal gift or estate tax is the responsibility of the donor of the decedent's estate. But if the gift or estate tax isn't paid by the donor or the estate the IRS has the right to come after the donor or heir.
Myth No. 6: Spouses who have separated but have not yet obtained a divorce have only two choices when it comes to filing returns: filing jointly or using married-filing-separately status.
Reality:There are important exceptions. A spouse may be able to qualify to file either as a single person or under the beneficial head-of-household status. Various tests imposed by the tax law must be met. Note: Filing jointly usually means you are liable for any tax later found to be owing -- either by you or by the other spouse.
Myth No. 7: Spending money to get a tax deduction is always the right move.
Reality:Not always. The days of the old fashioned tax shelters are gone. Money should never be spent or invested just to gain a deduction.
Myth No. 8: A pay raise can cause you to lose money by pushing you into a higher tax bracket.
Reality:Rarely. The graduated rate bracket system prevents this. But because of certain quirks in the tax laws, higher-income individuals will feel the tax bite more as their income rises.
Myth No. 9: Tax-exempt income is never taxable.
Reality:Not necessarily. Income that is exempt from federal tax may be subject to state tax. Also, large enough amounts of tax-exempt income may cause individuals receiving Social Security benefits to pay tax on a greater amount of such benefits.
Myth No. 10: The IRS will always accept canceled checks as proof of charitable contributions.
Reality:Not anymore. The law has changed. For charitable gifts of $250 or more, a written acknowledgment must be obtained from the charity.
Myth No. 11: The IRA deduction is defunct for those who have retirement plans at work.
Reality:This is not entirely true. If your adjusted gross income for 1994 falls below $35,000 for single filers and heads of households, or below $50,000 for joint filers, you are entitled to at least a partial deduction for an IRA contribution. Remember, you can always make up to $2,000 per year in nondeductible contributions to an IRA (and up to $2,250 in the case of a spousal IRA) and have that investment grow on a tax-deferred basis.
Myth No. 12: State and local general sales taxes, taxes on gasoline and driver's license fees are deductible for federal income tax purposes.
Reality:Not anymore, unless they qualify as business expense deductions. Sales taxes, gasoline taxes and license fees have not been deductible on federal returns for many years. State and local income taxes, as well as real estate and personal property taxes, are still deductible as itemized deductions on your federal return.
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