12 Tax Myths: Busted – Forbes Advisor

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Tax season is here again, but the recent changes—even the temporary ones—to tax law may have you feeling confused.

From the advanced Child Tax Credit payments to cryptocurrency, it’s natural to ask everyone else in your life how they’re handling money received and money owed on this year’s return. But beware—the tips you receive just might be more myth than fact.

To help you prepare your 2021 income taxes, we asked tax experts to share common myths they bust to ensure their clients file accurate returns. Their expertise can help ensure that you receive money the government owes you and help you avoid penalties for underreporting.

Tax Myth #1: I Owe Taxes Because of the Third Stimulus Payment

Just as the first two stimulus payments issued to Americans in 2020 weren’t taxable income, the third stimulus payment isn’t taxable income, either. However, some Americans believe the third stimulus payment affects whether or not they owe taxes.

According to the IRS, receiving the third economic impact payment “will not reduce your refund or increase the amount you owe when you file your 2021 federal income tax return in 2022.”

“The reason the stimulus payments are included in the 2021 tax return is to ensure everyone received the correct amount,” says Rob Burnette, CEO, financial advisor and professional tax preparer at Outlook Financial Center. “If you had a child born in 2021, then you would be entitled to a stimulus payment that the IRS wasn’t aware of because they were using 2020 data.”

So how do you get money the government still owes you if you didn’t receive your third stimulus payment? The IRS says that when you file your return electronically, the tax software will help determine how much you’re still owed. That amount will either be included in your refund or reduce your tax bill.

Tax Myth #2: I Didn’t Get All My Child Tax Credit Payments, So I Guess I’m Out of Luck

If you think you’re missing some of your Child Tax Credit payments for any reason, you can recoup that money when you file your 2021 taxes. Even if you don’t earn enough to be required to file a return ($12,550 for a single filer in 2021), you’ll need to file to get those missing payments.

One easy way to file so you can get missing payments is using GetCTC.org, which can help you file your taxes for free. If you prefer to use a tax professional or other software, both can help you claim any outstanding amount you’re owed.

Tax Myth #3: I Can Take a Home Office Deduction Since I Worked From Home During The Pandemic

If you’re a W-2 employee, the answer is “unfortunately, no,” says Doug Campbell, CPA and vice president of tax support at Liberty Tax.

“Before 2018, you could potentially deduct ’employee business expenses.’ However, the 2017 [Tax Cuts and Jobs Act] repealed that deduction,” he says. “So, if you are an employee, any unreimbursed business expenses are no longer deductible, including home office costs.”

Tax Myth #4: Gifts and Money Sent From Friends and Family on Venmo Is Taxable

Gifts are excluded from income regardless of the amount or the payment method, says Eric Bronnenkant, CPA and head of tax at Betterment.

“There is a new rule which requires payments over $600 for products/services to be reported on a 1099-K when using a service like Venmo,” he says. “Gifts should not be reflected on the 1099-K and even if you erroneously get a tax form, a gift is still not taxable. You can thank your grandma for your birthday gift and breathe a sigh of relief.”

Tax Myth #5: Students Don’t Have to Pay Taxes

Students typically earn less than Americans working full-time and often don’t earn enough to require filing an income tax return. The Urban Institute found that in 2015 to 2016, (the latest data available), full-time dependent students with income earned a median $3,900.

Nate Hansen, CPA and founder of SuperFastCPA, says whether you have to file all comes down to how much income you generated—whether you’re a student or not. “If someone earns any amount equal to or greater than the standard deduction, which is $12,550 for tax year 2021, then that person must file a tax return,” he says.

Even if your income doesn’t reach that threshold, you may still want to file for the following reasons:

  • If you had taxes withheld from your pay or paid estimated tax payments.
  • You qualify for certain credits, such as the Earned Income Tax Credit, the Child Tax Credit or American Opportunity Tax Credit, which has the potential to generate a tax refund.

Tax Myth #6: If I Got Paid for Goods and Services in Cryptocurrency, I Don’t Have to Pay Tax on It

Cryptocurrency isn’t like regular dollar bills or money in your checking account. Since it only exists in the digital space, it can’t possibly be taxable, right? Doug Campbell at Liberty Tax pegs this tax myth as false.

“Virtual currency is treated like property for tax purposes,” he says. “Any property received in exchange for goods or services is taxable and not a capital gain, but rather ordinary income, such as wages.”

Even if you exchange one form of cryptocurrency for another (known as a like-kind exchange), that’s still a taxable transaction. “Like investing in stock, if you exchange one corporation’s stock for another, the transaction is treated as a sale of the stock you gave up,” Campbell adds.

Tax Myth #7: Cryptocurrency Doesn’t Count Toward Capital Gains

Nicole DeRosa, a cryptocurrency tax expert at Wiss, a full-service tax and advisory firm for private companies, swats this myth out of the air like a mosquito on a hot June night.

“The Internal Revenue Code was recently amended to include virtual currency,” she says, citing cryptocurrency provisions in the Infrastructure Investment and Jobs Act of 2021, signed into law in Nov. 2021. “This means failing to report and pay taxes on crypto is more likely to result in underpayment penalties and accuracy penalties that can quickly add up.”

She adds that more trading platforms are offering tax documentation to make it easier for users to accurately report capital gains from crypto transactions. However, it’s important to know how to find your data and export crypto transaction history in the case of your trading platform doesn’t offer tax documentation.

Tax Myth #8: If I Didn’t Receive a 1099-NEC, I Don’t Have to Report the Income

No paper, no trail, right? Wrong. Even if you didn’t get a 1099 for income you received, you still have to report it on your taxes. That’s because while the IRS requires businesses to issue a 1099-NEC to anyone they’ve paid $600 or more in a calendar year for services rendered, earning less than that doesn’t exempt you from paying taxes on that income.

“The client who asks that question already knows the answer, but they’re really looking for permission to not have to report what is otherwise clearly income,” says Steve Jager, CPA and partner with Fineman West & Company. And yes, this includes any payments you receive in cash, too.

And if you think the IRS won’t know, think again. Payees are required to send copies of any 1099s issued to the IRS, which means the IRS already knows how much income you received.

“You should assume that any money deposited into your bank account is ‘fair game’ for the IRS,” says Jager. “In the event of an IRS audit, the Examining Agent will perform a bank deposit analysis, and every deposit will be considered to be income unless you can demonstrate that it is not.”

Tax Myth #9: There’s No Way to File Your Taxes for Free

While the US tax code is anything but simple, that doesn’t mean you always have to pay to file a return.

If you have a simple tax return, you can likely file your taxes online for free at one of the many official free e-file of the IRS, or through a partners site like Cash App Taxes (formerly Credit Karma Tax).

Many of the major tax prep companies like H&R Block and TurboTax offer free filing services, too. Although, you’ll typically have to upgrade to a paid product if you have more complex taxes (eg, you itemize or you’re a small business owner). It’s important to note that even if you have a more complicated tax situation, it’s possible you can still file for free using Cash App Taxes, but be sure to check out the forms they can’t support on this list.

Tax Myth #10: Filing a Paper Return Is the Most Secure Way to File Your Taxes

“No, no and no!” says Burnette with Outlook Financial Center. “The IRS even encourages [taxpayers] to file online.”

Why is digital better than paper? Several reasons, including security and speed.

“Tax scammers will try to intercept your paper return and use the data within to steal your identity,” Burnette says. He adds that there’s always the possibility of the IRS losing your return, too.

But for those filing accurate returns electronically, the IRS estimates you’ll receive your refund within 21 days of filing. And if you needed any morement to file electronically, the IRS is still processing paper returns from 2020. Yikes encourage.

Tax Myth #11: Filing an Extension Means I Have a Longer Time to Pay My Taxes

Mike Haller, Enrolled Agent and owner of Haller Group, PLC, says filing an extension only buys you time to file your tax paperwork, not additional time to pay taxes you owe.

“Even if you owe money to the IRS, it still needs to be paid by Tax Day to avoid interest and penalties,” he says.

If you don’t pay the taxes you owe by Tax Day; The IRS will charge you a 0.5% penalty each month (up to a maximum of 25%) from the due date of your return until you pay the taxes owed.

Tax Myth #12: Your Tax Preparer Is Responsible for Any Mistakes on Your Return

Wouldn’t it be bliss to pass the buck like this? Alas, it’s untrue. You, as the taxpayer, are still legally responsible for any and all information on your tax return.

“While a professional tax preparer is likely much better informed on the tax code and its ever-evolving nature, they are still constrained by the information they receive from the taxpayer,” says Burnette from Outlook Financial Center.

Burnette adds that if a professional tax preparer takes positions that are fraudulent or unreasonable, the taxpayer does have legal recourse available against the tax preparer. However, it doesn’t change the fact that you, the taxpayer, are ultimately responsible for the accuracy of your return—and you accept that responsibility when you sign your return.

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