Clearing up some income tax myths

BONDY ON MONEY

March 26, 1995|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

Here are common misperceptions about federal taxes. Each myth is followed by the correct explanation:

* Myth: Taxpayers who take the automatic four-month extension instead of filing by April 15 are more likely to be audited. Wrong. There is no correlation between extending the return-filing deadline and getting audited.

* Myth: If you can't pay your tax, it's best not to file your return. Absolutely wrong. Failure to file a return is a federal crime. Taxpayers who can't pay all or part of the tax should file their returns and attach a filled-out Form 9465, requesting an installment payment plan from the Internal Revenue Service.

* Myth: If you support your parents in a nursing home, you can't claim them as dependents. Not necessarily. Parents need not live with you for you to claim them as dependents.

* Myth: Money received as a gift or inheritance is taxable. Not as a general rule. Money or property received as a gift or inheritance is exempt from the federal income tax. Further, payment of the federal gift or estate tax is the responsibility of the donor or the deceased's estate.

* Myth: Spouses who have separated but have not yet obtained a divorce have only two choices when it comes to filing returns: to file jointly or use married-filing-separately status. Not always. There are important exceptions. A spouse may be able to qualify to file either as a single person or using the beneficial head-of-household status. Various tests imposed by the tax law must be met. Note: Filing jointly usually means you are liable for any tax later found to be owing -- either by you or your spouse.

* Myth: Spending money to get a tax deduction is always the right move. Not always. The days of the old-fashioned tax shelters are gone. Money should never be spent or invested just to gain a deduction.

* Myth: A pay raise can cause you to lose money by pushing you into a higher tax bracket. Hardly ever. The graduated rate bracket system prevents this. But because of certain quirks in the tax laws, higher-income individuals will feel the tax bite more as their income rises.

* Myth: Tax-exempt income is never taxable. Not always true. Income that is exempt from federal tax may be subject to state tax. Also, large enough amounts of tax-exempt income may cause individuals receiving Social Security benefits to pay tax on a greater amount of such benefits.

* Myth: The IRS will always accept canceled checks as proof of charitable contributions. Wrong. The law has changed. For charitable gifts of $250 or more, a written acknowledgment must be obtained from the charity.

* Myth: The individual retirement account deduction is defunct for those who have retirement plans at work. Not entirely true. If your adjusted gross income for 1994 falls below $35,000 for single filers and heads-of-household, or below $50,000 for joint filers, you are entitled to at least a partial deduction for an IRA contribution.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.