5 Common Tax Misunderstandings that Could Cost You

Paying federal and state income taxes is a responsibility of all wage earners in the United States. While federal taxes are filed by people every year, the tax system is complex and there are many misunderstandings and misconceptions about the federal tax system. There are five misunderstandings in particular that could actually end up costing you.

Not Withholding Enough in Taxes

The first misunderstanding that many people have is that they should pay as little in taxes as possible along with their withholdings. This thought process goes along the same line of thinking that having a tax return is equal to giving the IRS a free loan. While it would be a good idea to limit the amount of money that you receive back in a tax return, if you do not withhold enough money during each pay period it could lead to a big tax bill at the end of the year. Beyond having to come up with the tax balance, you could face IRS penalties for not withholding enough during the year.

Ignoring Tax Benefits

One of the biggest misunderstandings that people make about filing taxes is the conception that they won't qualify for any deductions of tax credits. Due to the complexity of the tax code, there are dozens of different tax credits that many taxpayers would qualify for. In fact, it has been estimated that people overpay billions of dollars each year by not taking advantage of deductions and credits available to them.

Forgotten Income

When you file taxes, one of the most basic components of your tax return is reporting income. While most people know that they have to report income if they have received a W2, many believe that miscellaneous income does not need to be reported if they have not received any documentation. However, this misunderstanding is incorrect as a taxpayer that is caught not reporting income, including even minor amounts, could face IRS penalties and other fines.

Not Paying or Filing on Time

Many taxpayers also believe that the tax filing date is not an actual deadline and that filing late is acceptable. While the IRS does allow for tax extensions, this require the filling out and submission of a formal tax extension document. Furthermore, if the taxes are extended, a taxpayer is required by law to pay an estimated amount of what their tax liability will be when the taxes are filed.

Forgetting Your Rights

The fifth misunderstanding that many people have is that they do not have any rights when it comes to dealing with the IRS. While being audited can be an intimidating process and people may feel out of control, the taxpayer does have a lot of rights. The Taxpayer Bill of Rights was introduced in 2014 and gave a lot of specific rights to taxpayers. Some of these rights include having the right to be informed, the right to receiving quality and respectful service, and the right to not have to may more in taxes than what is owed.

William Doonan is a tax law and legal expert in New York.