5 Tax Tips Your Friends May Have Wrong

Friends love to share tips and tricks about everything. From cars to newborns, we love to give the inside scoop on how to master all things in life — especially taxes. But how do you know when our friends are sharing truly helpful tax breaks or sharing possibly terrible tax mistakes? Well, I am going to give you the truth about 5 common tax myths and misinformation that friends love to share with one another.

Myth #1: Married taxpayers can file head of household to get larger refunds or lower taxes

Married taxpayers living together are allowed by the tax code to file either as married filing separately or married filing jointly as their filing status. However, the qualify for the head of household filing status, a taxpayer must meet all 3 of these requirements:

Be unmarried or considered unmarried and not a surviving spouse
Pay for more than 50% of the total cost of keeping the home and household
Have a qualifying dependent living with them, or is maintaining the household of their parent who qualifies as a qualified dependent

But spouses who are living together and are still married by the end of the year cannot claim the head of household filing status for a tax break. Even if one spouse is the breadwinner between two working spouses, or one spouse stays at home while the other spouse works. You must meet all 3 of the above requirements to legally claim the head of household filing status.

Now, if you are not living together but still married, then we might need to talk about your options.

Myth #2: Only report the income received from W-2s and 1099s

Even if you do not receive a form 1099 or a W-2, you are supposed to report all taxable sources of income you receive during the year on your tax return. You want to avoid senseless possible penalties and interest at all cost. No one wants to give the IRS a “tip”, and not reporting income usually results in reduced refunds, additional taxes, and expensive penalties.

As for what happens to the employer or person who was supposed to give you the 1099 or W-2? They will most likely be giving the IRS a nice “tip” in penalties.

Myth #3: The IRS cannot find cash or cash transferring app payments

Usually when we receive money, we like to spend money. That is why the IRS can legally reconstruct how much money you received during a tax year by not only reviewing bank deposits, but also by how you are spending that cash.

So, yeah, they have ways of finding out if you are receiving cash. It is best to save yourself the headache, penalties, and interest, and just report the cash on the return if it is income that should be reported.

Myth #4: If you have a home office, you can deduct all of your home expenses

First, you have to love a friend who is trying to save you or your business money. But the tax law is very strict about the rules for deducting expenses as it relates to the business use of your home.

The good news is the space used does not have to be an entire room. It can literally be any space in your home as long as that space is used is used exclusively and regularly for your business.

Once it is determined the space is used exclusively and regularly for business purposes only, the home office must pass one out of these 3 tests:

Is the space your principal (or main) place of business?
Is it normal for your business to meet with patients, clients, or customers in your home office?
Is the space a separate structure (not connected to your home) that is used for your business?

Once it is determined that you have a qualifying home office, you will need to square footage of your space and the square footage of your home.

To claim the business use of home deduction using the simplified method, you will only need the square footage of your space. The maximum square footage you can use for the simplified method is 300 square feet which results in a maximum deduction of $1,500.

If you believe your business use of home expenses will be more than $1,500 or if your space’s square footage is larger than 300 square feet, you will use Form 8829. You will need both the square footage of your space and the square footage of your entire home. This will determine your percentage for business use of your home expenses.

Most people do not use most of their principal residence for the exclusive and regular use of their business. Therefore, all of your home expenses will not be deductible. But you could still claim a helpful deduction if your home office space meets the qualifications and you maintain good records during the year.

Note: Daycare facilities and space used for storage have different rules.

Myth #5: If you don’t file a return, you won’t owe anything

Typically, if all of your income combined is more than the standard deduction for your filing status, you might not need to file.

But if you earned money during the year that required you to file a return, and you know you need to file, not filing will not pay prevent a bill from showing up.

When you do not file, no statute of limitation (think expiration date) has been established for how long the IRS can look at that tax year and say you owe them taxes, penalties, and interest. Therefore, the IRS can look back and bill you for as far back as you did not file your taxes by filing a return for you – also known as a substitute for return.

When you leave it to the IRS to file for you, they will not select the most accurate filing status for you (it is either single or married filing separate), they will not claim your dependents, and they will not claim any deductions or credit you may deserve. Therefore, the bill will be in their favor until you file a return to say otherwise.

Then the substitute for return can be enforced and go through the collection process. But keep in mind, it is a substitute return and not the original one. This issue can be fixed by filing those original returns your “friend” told you not to file — and we can help you.