Common Taxpayer Misconceptions

The National Association of Enrolled Agents has polled its membership and compiled this list...

1) Social Security Benefits are not taxable.

Fact: The percentage of your benefit that is taxable can range from 0% to 85% depending on the amount of other income that you are reporting. 

2) I don’t need to report stock sales if I bought other stocks with the proceeds or if I reinvest the money from a stock sale without receiving cash.

Fact: Stock sales outside of retirement accounts must be reported.

3) I’m a student and only work part-time, so I don’t have to file a return.

Fact: Filing requirements are based on filing status, dependency status, amount of income, and whether it is earned or unearned – not whether you’re a student.

4) It’s my tax preparer’s fault.

Fact: No matter who prepares your tax return, you are legally responsible for its contents.

5) My deadbeat cousin lives in one of my rental properties. He doesn’t pay much, but I can still treat it as a rental.

Fact: There are limits on how far below fair market rental value you can go – including the fact that expenses cannot exceed income. There may be other limits as well: The Tax Court has suggested that a fair rent for a family member could be up to 20 percent below market.

Fact: Unless you were legally divorced or separated as of the end of the year, you cannot file as single. Your choices are:

- Married Filing Jointly with your separated spouse

- Married Filing Separately

- Head of Household (assuming you meet other requirements for this status)

7) If I take dividends instead of wages from the S corp I own, I can save on payroll taxes.

Fact: Reasonable compensation must be paid before any dividends or loan repayments are permitted – and failing to properly report wages could result in reclassification of the dividends or loan repayments as wages, with penalties.

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