These Tax Myths Can Be Expensive For You!
Our culture is overflowing with myths. People feel comfortable believing in many myths. They are mainly half truths. And most important, they cost you big money. Here are some of them
1. There is an exemption for students from tax.
Please note, there is no tax provision specifically exempting students. All of them are subject to income tax. They get special tax credits, no doubt. The hope credit and the lifetime learning credit are available for students. The distribution from section 529 plan is also tax free for the students. However income of the students is subject to tax.
Many students who work check the box ‘exempt’ on their W-4. Now suppose for the year 2008 such student earns more than $5450 and he or she is claimed as a dependent on the return of parents. In such a case owing more than $1000 in taxes will result in penalties.
2. A child who is working cannot be claimed as a dependent
This is not true. If you provide more than half of a child’s support and meet others criteria like citizenship and relationship, then the child is qualified as your dependent and you are allowed to deduct all the medical costs for that child. The main point here is providing support. So even though the child makes a lot of money still if you pay to support the child, then you can qualify for a personal deduction.
3. If I am crossing 55 then there is no tax on sell of my house.
In the past, there were some provisions under which you could claim exemption up to $125,000 in gains from selling your house. This exclusion was available for one time only. However the things are better now.
Under the present law your age is not relevant. If you sell your principal residence which you occupied at least for two out of the last five years, you can exclude up to $250,000 in gain (if you are filing jointly then this amount increases to $500,000)
How many times you take the benefit of this exclusion is not relevant. You can sell your house every two years and get the exclusion up to this limit!
4. As I’m married I must find a joint return
Actually if you are married you still have the option of filing ‘married filing separately’. Normally this option results in paying more taxes. However you can take benefit of this option in some specific situations like claiming medical expenses if one spouse has substantial medical deductions.
So you have to weigh the options before you finally decide how to file. And you have the option of changing the filing status every year.
Our tax code is too complicated and there are frequent changes also. So many people feel that once a rule is in force, it will continue. Please to not fall in the trap of such irrelevant rules. They will cost you big money!