From GOBankingRates — By Dave Ramsey —
There are a lot of tax myths floating around because many people do not understand how their taxes work. Some you may have heard from family, friends or even a social media influencer. In this article, GOBankingRates examines five tax myths written about on Dave Ramsey’s website Ramsey Solutions, and why these myths are harmful.
Myth 1: Your tax refund is free money
A tax refund is the amount you get back after filing your taxes. And to some people, receiving this money means that they paid less in taxes. On the contrary, it actually means that you overpaid the government throughout the last year and you’re only getting your balance back.
If you withheld more than you owe, you will be entitled to a refund. If you did not withhold as much as you owe, then you may have to make a tax payment.
“The goal is to get your tax bill as close to $0 as possible,” according to the post on Ramsey Solutions. “So if you’re getting a huge tax refund or tax bill every year, it’s time to adjust your tax withholding.”
Myth 2: It’s bad to be in a higher tax bracket
Some people believe it’s not worth moving up tax brackets as the government will take the extra that you make in taxes. The truth is, being in a particular tax bracket does not mean that is the rate you pay on all of your income.
This is because the tax system in the United States is progressive; you only pay the rate for the income that falls in that particular tax bracket.
For example, let’s say you make $50,000 in gross income. While you fall into the 22% federal tax rate (for 2023 and 2024), you don’t pay 22% of $50,000 in taxes. Instead, you pay 10% on the first $11,000 of income, 12% from $11,000 to $44,725 and the full 22% rate on that last $5,275.
The Ramsey Solutions article affirms that making more money is a good thing. “Don’t turn down the opportunity to raise your income because you’re afraid of ending up in a higher tax bracket.”
Myth 3: Staying in debt is good for tax reduction
You will be surprised that many people consider this a real thing. They stay in debt so they can get a tax deduction that’ll lower their tax bill on things like mortgage loan interest, student loan interest or car loan interest. But this is no smart move. According to the Ramsey Solutions post, “spending a dollar just to save a quarter on taxes is not smart. It’s the opposite of smart.”
Living in debt is not a great option no matter the tax benefits. More than likely — and especially with today’s interest rates — you will end up paying much more in interest than you will get back in tax deductions. If at all possible, focus on becoming debt-free as you’ll save a lot of money when you’re not having to pay extra in interest over time.
Myth 4: You can ignore your tax bill if you miss the deadline
You can ignore someone at your door and they’ll eventually go away — but no matter how long you ignore your tax bill, it’s never going to disappear. Instead it’ll bring you consequences like interest and penalties. “Ignoring your tax bill is just about the worst thing you can do because the IRS will start charging interest and penalties immediately (even if you filed for an extension),” said the Ramsey Solutions article.
If you happen to pass the tax deadline without paying your tax bill, you can manage the situation with a few options. These options include applying for a tax extension. You won’t get more time to pay but you will avoid the late-filing penalties. You can also pay what you have by the deadline even if it’s not the entire bill. That way, you’ll incur less penalties and interest. Then apply for a payment plan with the IRS to tackle your outstanding tax balance.
Myth 5: You can’t do your own taxes
Taxes are not as complicated as they may first appear. They don’t require some sort of advanced skills or degree, just your willingness and potentially a tax software to simplify the process.
If you have one or two sources of income and a simple lifestyle, your taxes should be easy enough for you to do them yourself.
However, the Ramsey Solutions article says that if your tax situation is complicated, you may want to consider seeking help.
You’d be better off having a tax pro handle your taxes if you have circumstances that complicate taxes, like owning a business, having significant investments outside your retirement account or have recently experienced major life changes (that impact your taxes).
Contact Kleshinski, Morris & Morrison CPAs
If you need help with your taxes, or any type of professional accounting services, contact the experts at Kleshinski, Morrison & Morris CPAs. Reach us by phone at 419-756-3211, email to kmm@kmmcpas.com, or by filling out the contact form on this website here.