Myths Increase Tax Season Agony Don’t Let Misconceptions Deter Filing, Funding Ira

Reminder: You have two days to file your 1994 income taxes.

With the deadline close at hand, let’s take a few minutes of your remaining time to dispel some tax myths identified by the American Institute of Certified Accountants.

If you haven’t filed yet, smashing these myths might save you some money yet. Even if you have already filed, understanding some of the basics in the tax code can help you devise a year-round tax strategy to trim your tax bill.

Among the myths:

If you can’t complete your return by midnight tomorrow and you file for an automatic extension (Form 4868), you’re asking for an audit.

Wrong. The IRS swears there is no correlation between those who file for the four-month extension and those who are audited. Remember, even if you file for the extension, you have to estimate how much you owe in taxes and pay it.

Another common auditing myth - that using the preprinted label triggers additional scrutiny - also is wrong.

Indeed, using the label could speed things up if you are due a refund.

Finally, Nick Hall, assistant district director of the Detroit IRS office, says there’s no truth to the rumor that by filing electronically you’ll increase your odds for an audit.

Electronic filing does make it easier and cheaper for the IRS to process your return. For three out of four taxpayers, that means their refunds will get in the mail sooner.

If you can’t pay your tax, don’t file a return and take your chances.

Bad move. Knowingly failing to file a tax return is a federal crime. If the IRS catches up with you, and the chances of that are better than ever, there’ll be interest and hefty penalties to pay.

Instead, fill out Form 9465, which requests an installment plan from the IRS. You propose the terms of the payback; the IRS is fairly liberal here.

New this year, though, is a $43 filing fee for paying over time.

Parents you support, say, in a nursing home, but who don’t live with you cannot be claimed as dependents.

Not true. A number of criteria are used to determine who is a dependent. Key among them, however, is whether you provide more than half their support. This is true even if your parents live in a nursing home.

Dependents who are not relatives under the tax code, however, must live with you.

Money you receive as a gift or an inheritance is taxable.

Not usually. Money you receive is exempt from federal income tax. The person or estate giving you the money may have to pay some tax. But parents can give as much as $10,000 per recipient per year and not trigger a gift tax.

Spouses who have separated but not yet divorced must file their returns jointly or as married filing separately.

Not necessarily. If, for example, you are legally separated from your spouse by a separate maintenance decree, you could file as single. This might be important because even though the tax tables are higher for single filers than those who file jointly, joint filers are liable for any taxes owed by themselves and their spouses.

Spending money for a tax deduction, such as buying equipment or making certain investments, is a savvy tax strategy.

Not usually. At least, not if the tax consequences are your main reason for making the move.

Taxes should always be considered, but spending money just to get a deduction is seldom smart. Remember, tax deductions reduce the cost of an item by saving you taxes. But they don’t eliminate the cost. If you’re buying something unnecessary, tax deductions at best will only reduce your loss.

At a certain point, pay raises cost you money by pushing you into a higher tax bracket.

Everyone should have this problem. Anyway, it’s almost never the case that you would have ended up with more money before a pay raise.

At higher incomes, you may decide that the increased income is hardly worth the increased responsibilities or effort. But that’s something else again.

Don’t have a receipt from that charity you donated to? No matter. Just save your canceled check.

Not anymore. As of this year, the IRS requires written acknowledgment from the charity for gifts over $250. If you can’t find the receipt, call and get a short note on charity stationery.

If you have a pension plan at work, kiss those tax-deductible IRA contributions good-bye.

Not necessarily.

If your adjusted gross income is below $35,000 for single taxpayers and heads of households, or below $50,000 for those married filing jointly, you’re entitled to at least a partial deduction for those contributions. Make under $25,000 and $40,000, respectively, and the full contribution (up to $2,000 annually; $2,250 with a spousal IRA) is deductible.