5 Tax Misconceptions You're Getting Wrong

Did you know that some of the most common things people believe about taxes is actually wrong?

I'm a CPA and I've been unraveling the complexities of taxes for decades. Today, I'm going to share my top five misconceptions about taxes that might just surprise you.

Whether you're a tax pro who thinks you've heard it all or someone who finds taxes confusing, this blog post is packed with fun surprises and insights.

Ready to find out what you might be getting wrong about taxes?

Let's dive in.

Tax Misconception #1: How Come I Didn't Get a Refund?

Taxpayers often say, "how come I didn't get a return?"

You mean how come you didn't get a refund? I think that's really funny. It's hilarious, actually. But if you don't get it, it's because they meant "refund", not return. The taxpayer should have said, "how come I didn't get a refund?"

You see, a return is your tax return. If you prepared or had someone prepare your tax return, then there you go, you got yourself a return.

A refund is what you get after you filed your tax return. That is, if you've paid in more in taxes than you owe. So what you get back is a refund.

I don't know where this originated or why people think that returns mean refunds. It's really funny to us tax professionals. We laugh every time we hear it because it makes absolutely no sense.

It's like saying, "I need to put car in my gas."

Wait, what?

Yeah, I need to put car in my gas.

Sorry. That's not even a good example. But you know what I mean.

Tax Misconception #2: I Didn't Get a 1099, Do I Still Have to Pay Taxes?

Taxpayer says, "I sold stuff on eBay and didn't receive a 1099, so I don't have to pay taxes on it. Right?"

Wait, what?

No.

1099 or not, if you earned income, it's technically reportable to the IRS. 1099 reporting is generally helping to keep people honest, but, okay, so right now for 1099K reporting, it's $20,000 and 200 transactions.

So some people think incorrectly if they sold $19,000 of stuff on eBay and they didn't receive a 1099, well, they don't have to report it.

I'm sorry. I hate to break it to you. 1099 or not, those transactions are reportable to the IRS and potentially taxable. Or maybe not taxable.

It really depends if whatever you sold was sold at a profit or not, you could actually be engaged in some sort of business activity and have a loss for the year, which can reduce your taxes.

So basically, just because you didn't receive a 1099 doesn't mean it's tax free. Does that make sense?

By the way, I did a bunch of 1099K YouTube videos on how to report that on your taxes. If you want to learn more about that, click on the playlist here.

Tax Misconception #3: Can I Deduct Unpaid Rent?

So clients often ask, "Noel, I've got this rental property. My renter left without paying for five months of rent. I can deduct that on my taxes, right?"

When you first hear this, it does sound somewhat reasonable. After all, you weren't able to collect on five months of rent, so you're basically out that money.

But can you actually deduct that on your taxes? Does that even make sense?

Well, if you think about it, that lost revenue was income or potential income that you didn't have to report on your taxes. So if you did or were able to deduct the lost revenue, which you're not able to, by the way, you would actually be double dipping. You would be receiving a double tax benefit.

So, no, the IRS does not allow you to deduct lost rent or lost revenue due to unpaid rents.

Let me put it another way. You basically don't have to report this income, the rents that you didn't receive. So essentially, it's deducted already.

Does that make sense? Sorry, that's just how it is. But I do see how people can get confused by this.

Tax Misconception #4: Can I Get a Tax Break for Buying a House?

Taxpayer says, "I bought a home, so I get some nice tax breaks, right?"

Actually, I hate to break it to you, but the tax breaks for owning a home pretty much went away. This is primarily due to the Tax Cuts and Jobs act of 2017, but that's set to expire at the end of 2025.

So if you own a home, typically you're able to deduct your mortgage interest, real estate taxes, income taxes, sales taxes, maybe medical expenses if they're high enough, and charitable contributions.

The Tax Cuts and Jobs act limited deduction for taxes to a maximum $10,000. So that severely limited the possibility of itemizing your deductions on your tax return. If you're not itemizing your deductions then you're taking the standard deduction which everybody gets.

Basically, you're going to take whichever is higher since it gets you the biggest tax benefit. Makes sense.

Now, I do feel really bad for the people who bought a house and expected a huge tax break or tax benefit, but they end up not receiving it.

At the end of the day, they were probably misled unintentionally by maybe the real estate person or someone else, or maybe they just had outdated information. But as of right now, there's little to no tax benefits for owning a home.

Now, on the state level, that could be completely different because in Illinois, for example, they offer a 5% tax credit on real estate taxes paid.

So there's that. Last but not least,

Tax Misconception #5: Can I Claim My Spouse as a Dependent?

New client comes in.

So tell me about your tax situation. I say, it's typically a woman who does this. She says, "I'm married, I work two jobs."

I ask about her kids or dependence. She replies back with, "Oh yeah, I have two kids and I also want to claim my husband."

Wait, what?

"Yeah, I want to claim my husband too. He doesn't work and I support him."

I don't know if she's done this before, but sorry, you can't claim your husband as a dependent on your tax return. I understand you probably think he's a bum. Maybe he doesn't work, maybe he's going through something, but that's not how it works.

You can't claim your spouse as a dependent on your tax return.

Now, you can file as married, filing jointly, and that does come with some indirect tax benefits. And you can definitely claim your kids but not your spouse, regardless if you support them financially or not.

Sorry, not sorry.

So all right, my rant is over. Thanks for reading and see you in my next blog post!