Most of us aren’t tax experts, and tax season can be stressful. It doesn’t help that there are endless myths about paying taxes and what happens when you don’t, so we’ve compiled a list of tax myths and what you can do to avoid issues in the future.
Myth #1: Fines are the Same No Matter What You Owe
While it would be easier to have the same fine across the board, penalties for filing taxes or submitting your information late vary depending on what you owe. While filing late is better than not filing at all, you could still face serious penalties.
Penalties include:
- 5% of unpaid taxes for each month the federal return is late
- 25% of unpaid taxes for missing federal returns
- 10% of unpaid state taxes and a $50 fine
- Continued failure to pay state taxes may result in criminal charges
Always pay your taxes on time even if you can’t afford to – there are options for appeals and relief available in these cases, and you may qualify.
Myth #2: Extensions Are Free
If you’re running late on your taxes, you can file an extension, but it will cost money. In order to avoid a failure to file pay penalty, you can pay up to 90% of the taxes you owe along with your request, but you should do so before the last minute.
Waiting until the eleventh hour to request an extension probably won’t work, and you may find yourself facing fines anyway. The IRS is a massive government organization which means their agents are busy and processing any request takes time. Even the most eloquent request won’t be acknowledged at the last second – always give the IRS time to receive and process the request.
Myth #3: If You Don’t Owe, You Don’t Pay
Even if you don’t owe anything on your taxes, a late filing is still late. In other words, the IRS does not accept late taxes without penalties. In some cases, the U.S. Treasury may keep your late fee as a donation or they may issue an additional failure to file fine.
Myth #4: You Don’t Pay Taxes on Cash or Cryptocurrency
Many people assume that if there’s no paper trail, there won’t be any taxes. Unfortunately, income is income, and whether you’re being paid with cash, paycheck, or Bitcoin, the IRS expects you to report and pay taxes on whatever you receive as income.
Myth #5: Higher Income = More Taxes
Income does make a difference in reporting your taxes, but getting a raise or a promotion doesn’t always mean a tax increase.
This myth comes from a common misunderstanding of marginal tax rates – the top tax rate. In general, the marginal rate is what you pay on taxable income – as income goes up, so does the rate, but everyone pays the same rate for the same income.
So, let’s say you make $75,000 this year, but you get a promotion, and now you make $100,000. You won’t pay taxes on the increase, but you will pay taxes in a higher bracket. Essentially this means that you’ll pay the same amount of taxes on your $100,000 that everyone else pays on theirs.
There’s a threshold for the percentage of taxes you have to pay, and an increase in income will not result in an exponential increase in what you owe – only the marginal rate increases.
Key Takeaway
Taxes are frustrating, but they’re a part of life. It’s easy to get confused by the myths and technicalities surrounding tax law, but that’s where we can help. At Buchalter & Pelphrey Attorneys At Law, we offer various tax law services to help clients make the right financial decisions.
Contact our team today for more information.