CLEARING UP SOME TAX MISCONCEPTIONS

Error #1. Using the automatic 4-month extension of filing your tax return by April 15 exposes you to a greater risk of being audited.

Wrong. There's no correlation between using the automatic extension and getting audited.

 

 

Error #2. Using the preprinted label on your return increases your chances of being audited.

Wrong. The preprinted label is used to speed up return processing. There's no correlation between using the preprinted label and being audited.

 

 

Error #3. You can't claim your parents as dependents unless they live with you.

Wrong. Parents need not live with you their children to be claimed as dependents. If other requirements regarding amount of support and amount of parents income are satisfied you can claim your parents as dependents even though they do not live with you.

 

 

Error #4. Money received as a gift or inheritance is taxable.

Wrong. Not as a general rule. Money or property received as a gift or inheritance is exempt from income tax. Payment of the gift or estate tax is the responsibility of the donor or the decedent's estate. However, if the gift or estate tax isn't paid the IRS can collect the tax from the donee or heir.

 

 

Error #5. Creating a revocable living trust saves income and/or estate taxes.

Wrong. The creation of a revocable living trust has no effect on income and/or estate taxes. A living trust may save probate fees and speed up the time it takes to transfer assets to beneficiaries.

 

 

Error #6. Distributions from tax-free funds are always tax-free.

Wrong. In addition to income, tax-free funds sometimes make capital gains distributions. The capital gains distributions are subject to income taxes even though they are distributed by tax-free funds.

 

 

Error #7. You can not make an IRA contribution if you earn more than $35,000 as a single filer or $50,000 as a married filer.

Wrong. If you or your spouse is not covered by a qualified retirement plan you can make a deductible IRA contribution regardless of how much income you earn. If you or your spouse are covered by a qualified plan you can still make a non-deductiblecontribution to an IRA. The advantage of making non-deductible contributions to an IRA is that the investment grows on a tax deferred basis.

 

 

Error #8. Canceled checks are always accepted as proof of charitable contributions.

Wrong. A written acknowledgment from the charity is required for all charitable contributions of $250 or more. A canceled check is not considered sufficient substantiation for contributions of $250 or more.