The US tax code is massive and complicated, but many people believe they know the parts of the tax codes that affect them.
Myth 1: Students are exempt.
There is no special tax status afforded to students. They are subject to tax on all their income, regardless of whether they’re fully enrolled. Students do get special tax credits, the Lifetime Learning Credit and the new American Opportunity Credit, which has replaced the Hope Credit for 2009 and 2010. Many students who work over the summer check the box “exempt” on their W-4’s. If they had no taxable income the previous year and don’t expect to have any the current year, that’s OK. However, if that student owes more than a $1000 or actually fails to file, he/she will be subject to tax and penalties.
Myth 2: My child is working, so I can’t claim him as my dependent.
As long as you provide more than half that child’s support the child qualifies as your dependent.
Myth 3: I’m over age 55, so I can sell my house tax-free.
It used to be that if you were older than 55 you could exclude as much as $125,000 in gains from taxes, but only once. The rules are actually better now. Under current law, age no longer matters. If the property sold was your principal residence for at least 2 out of the last 5 years, you can exclude from tax as much as $250,000 in gains and $500,000 in gains on a joint return.
Myth 4: I can deduct my sales tax.
Starting in 2004 and renewed through the 2011 tax year, you can deduct either your personal sales tax or your state income taxes from your federal income return, but not both. If the sales taxes paid were for purchases made in the course of business and the items bought would be allowed as a business deduction, then the sales tax on that item would be allowed as well.
Myth 5: I’m married, so I have to file a joint return.
If you are married, you can always file “married filing separately.” That normally results in you having to pay more in taxes. But in some situations, it can be to your advantage. For example, if one spouse has substantial medical or miscellaneous deductions, those deductions are subject to the 7.5% and 2% floors, respectively. That is, only medical expenses over 7.5% of adjusted gross income and miscellaneous deductions over 2% of adjusted gross income are deductible. If I had $10,000 in income and my spouse had $90,000 in income, the first $7,500 in medical expenses and the first $2000 in miscellaneous expenses aren’t allowed. But if I file as “married filing separately”, the disallowance would apply only to the first $750 in medical expenses and $200 in additional deductions.
The US tax code is complicated and changes with painful regularity. Our culture is full of myths and our tax system is full of half-truths, untruths and myths that can cost you if you don’t understand the rules. Don’t get caught using old distorted rules or myths.
