Our culture is full of myths. And our tax system is full of myths, half-truths and untruths that can cost you big bucks if you don’t understand the rules.
So let’s have a look at some of the bigger myths about taxes.
Myth 1: Students are exempt Lots of people believe there’s an exemption for students that excludes them from tax. There’s no special tax status afforded to students. They are subject to tax on all their income, regardless of how many credits they’re taking or whether or not they’re fully matriculated. Students do get special tax credits, the Lifetime Learning Credit and the new American Opportunity Credit, which has replaced the Hope Credit for 2009 and 2010.
Myth 2: My child is working, so I can’t claim him as my dependent
As long as you provide more than half that child’s support and meet other qualifications such as citizenship and relationship, the child qualifies as your dependent, and you can deduct, for example, all the medical costs you paid for that child. Remember, support is what’s spent, not what’s earned.
Myth 3: I’m over age 55, so I can sell my house tax-free
Wrong again, graybeard! You’re thinking old law.
It used to be that if you were older than 55, you could exclude as much as $125,000 in gains from taxes, but only once. Now the rules are even better.
Under current law, age no longer matters. If the property sold was your principal residence for at least two out of the last five years, you can exclude from tax as much as $250,000 in gain and $500,000 in gain on a joint return.
Your age is irrelevant, and you can take the gain exclusion every two years if you qualify.
Myth 4: I can deduct my sales taxes
This one was once up there with the Loch Ness monster, but the deduction has made a comeback of sorts.
Starting in 2004 and renewed through the 2009 tax year, you can deduct either your personal sales taxes or your state income taxes from your federal income return, but not both.
Myth 5: I’m married, so I have to file a joint return
Again, not true. If you’re married, you can always file “married filing separately.” That normally results in you having to pay more in taxes. But in some situations, it can be to your advantage.
For example, if one spouse has substantial medical or miscellaneous deductions, those deductions are subject to the 7.5% and 2% floors, respectively.