Tax MythBusters: The Top 5 Tax Tips to Amaze your Friends and Family
I commonly find there are sooo many misconceptions about taxes out there. I have heard a lot of them so many times, they make me laugh. I would like to dispel some untruths about taxes and educate you just a little. Here is my top 5:
- "I cannot afford to earn any more money this year because I will jump into the next tax bracket." or "Boy, I would not want to win the lottery. It would cost me too much in taxes."
Tax Brackets: In the US, our tax brackets are marginal. Only the next dollar that falls into that bracket will increase to the next higher rate. Even if you earn a $1,000,000, there is still a portion of income that is taxed in each bracket: 0%, 10%, 15%, 25%, 28%, 33% and 35%.
- "I will go ahead and give to charity since it is a tax write-off."
Deductions: Remember that deductions are not a $1 for $1 reduction in tax. A $100 deduction will save about $15 in taxes for someone with $60,000 income. This does not mean that you should not give to charity, but use your money wisely and make sure it is put to good use.
- "My customer did not pay their bill. I would like to write it off."
Bad debts can only be written off if they were claimed as income previously. In most cases, small business owners are cash basis tax payers and therefore, only pay taxes on the income when it is received. In this case if your customer did not pay you, you never have claimed it as income so you can not reduce your income further.
- "I don't want the IRS to come knock on my door to audit me."
IRS Audits: Most audits are not face to face. They are letter audits based on notices for matching or numbers that are out of the normal range on tax returns. If you do have a face to face audit, you should be well prepared and represented by your CPA or a tax attorney. Worst of all, be prepared to write a check. The IRS does not do face to face audits to see if you seem to be a nice person, their purpose is to collect revenue.
- "I can deduct the cost of my vehicle since I have my business advertised on it, right?"
Auto Deductions: Unless you want to be the one writing the big check to the IRS as discussed in item #4, the answer is "no." You cannot write off the cost of a vehicle for advertising. You can write off the cost of the magnetic signs or the painting to put your advertising on it, but you still must follow the same rules for deducting automobile expenses. Don't forget, unless the vehicle is 100% business use, you must keep track of your business and personal mileage for any deduction of your mileage. Remember, at 50.5 cents per mile for 2008, this can be a substantial deduction so it is worth while.
We hope we have given you the ammunition to join in the conversation with your friends to tell them about the tax mythbusters listed here. Keep in mind that you would not let your "friends" do your root canal, so you probably should not depend on your "friends" for authoritative tax advice. Ask your CPA!
Required US Dept of Treasury Circular 230 Disclosure: Any written advice concerning one or more federal tax issues arising from any entity, plan or arrangement that concludes at a confidence level of "more likely than not (i.e., a greater than 50% likelihood) that the subject manner of the advice would be resolved in the taxpayer's favor if challenged by the IRS, and the principal or significant purpose of the subject matter is the avoidance or evasion of any tax imposed by the Internal Revenue Code (IRC). The advice provided in this email is not intended or written to be used, and cannot be used by you or any other person or entity for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any applicable state or local tax law.