Common Misconceptions About Taxes
The Tax Cuts and Jobs Act (TCJA), aka tax reform, resulted in significant modifications to the federal tax code likely to affect every American taxpayer. TCJA became effective tax year 2018 and includes notable changes such as increases to both
the child tax credit and standard deduction. There are also new limitations with several itemized deductions removed altogether. The buzz surrounding these and other modifications has created misconceptions with many Americans concerned about this year’s tax bill. Fortunately, you can ditch the conflicting and often bad advice
from family members and friends by dispelling myths from facts.
Here are four common misconceptions about taxes and why things aren’t as dire as you might think.
Myth: I can no longer claim a deduction for the interest paid on my home mortgage or home equity loan.
Fact: You can still claim the home mortgage interest deduction, but it does come with new limitations. Previously, you may have used your home equity loan or home equity line of credit to pay off high-interest credit cards, college tuition, or for living expenses. While you can still use this money as permitted in your loan agreement, the interest paid is tax deductible only if used for specific purposes related to the residence itself.
In order to claim the interest paid on home equity related loans as tax-deductible, the funds must be 1) secured by your main or second home and 2) be “…used to buy, build or substantially improve the main or second home”. Borrowers are also limited to deducting interest based on the loan amount. Only interest on the first $750,000 ($375,000 if married filing separately) of the loan is eligible for the deduction. Higher limits apply if the loan originated before December 16, 2017.
Myth: It doesn’t matter if I take the standard deduction or itemize, I’ll still owe taxes.
Fact: The decision to take a standard deduction or itemize should not be based on last year’s tax filing. The standard deduction has nearly doubled for all filing statuses when compared to 2017. In some cases, itemizing your deductions will no longer be beneficial. Compare your itemized deductions to the standard deduction amount, and use whichever one is greater.
Myth: Owing less than $25 in taxes is unrealistic. I’ll either get a refund or owe a sizable amount.
Fact: The IRS offers two tools to make it easier to owe less money at tax time: Paycheck Checkup and the IRS Withholding Calculator. The Paycheck Checkup alerts you to situations in which a review of your withholding is necessary. The IRS Withholdings Calculator takes you through a series of questions to help you arrive at an appropriate withholding amount based on your financial goals.
Taxpayers are strongly encouraged to use both tools and give employers an updated Form W-4, so the correct amount is withheld from their checks. Instead of providing the government with an interest-free loan, i.e., your tax refund check, you can receive those funds during the tax year by having the proper withholding taken from each paycheck. It’s possible to owe less than $25 in taxes next tax season with the appropriate withholdings. This strategy will also help you avoid having too little taxes withheld, which may cause you to owe taxes or be subject to a tax penalty next year.
Myth: I can no longer claim the losses I experienced in a natural disaster.
Fact: You can still claim deductions using IRS Form 4684 for personal casualty and theft losses due to a natural disaster, but only if such claims are related to a federally declared disaster. If you’re unsure if a claim meets this requirement, visit the Disasters page of the FEMA website. It allows you to search for disasters by state, incident type, declaration type, and date.
Embrace this tax season with the facts and abolish unwarranted fears about your tax liability. Use what you learn this tax season to better prepare for next. While filing taxes may not be your favorite task this spring, it’s a great way to identify any midyear adjustments needed to ensure you’re on the path to achieving your financial goals. For instruction on how these changes apply to your specific financial situation, please review the Tax Cuts and Jobs Act resource page at irs.gov or speak with your tax professional.