Myths About Taxes
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Myths about taxes
by Crown Financial Ministries The U.S. tax code has changed in 35 of the last 38 years (as of 2002 taxes) and is scheduled to change every year for the next 7 years (until tax year 2011). Because many tax rules have changed and many more will change over the next few years, the remembrance of those former tax laws have created many myths and assumptions regarding paying taxes or filing taxes. Although there are numerous myths and assumptions relating to taxes, the following five myths are the most common. Myth #1: Students do not have to pay taxes Many students and parents alike believe that there is an exemption for students that excludes them from paying taxes. Nothing could be further from the truth! There is no special tax status for students. Therefore, they are subject to be taxed on any income they receive. Nevertheless, students can receive special credits like the Hope Credit and the Lifetime Learning Credit. In addition, distributions from a Section 529 Plan are tax free. Myth #2: Children cannot be claimed as dependents if they work This is another false assumption. If parents provide more than half of their children''s support and if the children meet citizenship and relationship requirements, they can qualify as dependents. In addition, parents can qualify for a personal exemption for each child whose annual income is less than $3,000 (in the 2002 tax year) and is under the age of 19 or is a full-time student under the age of 24 (a full-time student is one that attended classes for 5 months of a calendar year). Myth #3: Since I am over 55 years old, I can sell my house tax free Yes and no. The old tax rules said that if a homeowner is 55 years old or older he or she could exclude from capital gains tax $125,000 in profit from the sale of a home. That rule is still in effect, but with improvements. Under the current tax law, homeowners can exempt up to $250,000 ($500,000 on a joint return) of capital gains from the sale of a primary residence if they have lived in the home for at least two continuous years out of the past five years, regardless of age. For qualifying homeowners, this exclusion can be repeated every two years. Myth #4: Sales tax can be deducted Once this was true, but no longer. Before January 1, 1987 sales tax could be deducted as an itemized deduction. That deduction was removed in the 1986 tax law revision. However, if you pay sales tax on an item bought for a business and if the item qualifies as a business deduction, the cost of the item including sales tax can be deducted. Myth #5: Married couples are required to file a joint return Again, this is not true. All married couples are allowed to file either jointly or “Married Filing Separately.” However, “Married Filing Separately” usually results in paying more taxes. Married couples usually cannot file as "Single" or "Head of Household." Nevertheless, if a couple is separated and one has custody of a dependent child, the one who has custody can file as a head of household. A spouse can qualify as an abandoned spouse if he or she has lived apart from his or her spouse for a least six months of the year (this does not include time apart because of job or work-related obligations, military duty, or governmental duties) and has a dependent child living with him or her. An abandoned spouse can file as head of household. Conclusion Because of the yearly changes in the tax laws, rules that once were standard may no longer be in effect. For this reason, taxpayers should not assume that because a tax rule was once valid, it is still legitimate. For the most accurate information concerning any changes in the tax laws, we suggest that you consult with a local representative of the Internal Revenue Service, a tax consultant, your attorney, or a qualified CPA.
1 of 1
7/9/2008 9:37 PM
http://www.crown.org/LIBRARY/PrintPreview.aspx?ArticleId=498
Location: Taxes
Myths about taxes
by Crown Financial Ministries The U.S. tax code has changed in 35 of the last 38 years (as of 2002 taxes) and is scheduled to change every year for the next 7 years (until tax year 2011). Because many tax rules have changed and many more will change over the next few years, the remembrance of those former tax laws have created many myths and assumptions regarding paying taxes or filing taxes. Although there are numerous myths and assumptions relating to taxes, the following five myths are the most common. Myth #1: Students do not have to pay taxes Many students and parents alike believe that there is an exemption for students that excludes them from paying taxes. Nothing could be further from the truth! There is no special tax status for students. Therefore, they are subject to be taxed on any income they receive. Nevertheless, students can receive special credits like the Hope Credit and the Lifetime Learning Credit. In addition, distributions from a Section 529 Plan are tax free. Myth #2: Children cannot be claimed as dependents if they work This is another false assumption. If parents provide more than half of their children''s support and if the children meet citizenship and relationship requirements, they can qualify as dependents. In addition, parents can qualify for a personal exemption for each child whose annual income is less than $3,000 (in the 2002 tax year) and is under the age of 19 or is a full-time student under the age of 24 (a full-time student is one that attended classes for 5 months of a calendar year). Myth #3: Since I am over 55 years old, I can sell my house tax free Yes and no. The old tax rules said that if a homeowner is 55 years old or older he or she could exclude from capital gains tax $125,000 in profit from the sale of a home. That rule is still in effect, but with improvements. Under the current tax law, homeowners can exempt up to $250,000 ($500,000 on a joint return) of capital gains from the sale of a primary residence if they have lived in the home for at least two continuous years out of the past five years, regardless of age. For qualifying homeowners, this exclusion can be repeated every two years. Myth #4: Sales tax can be deducted Once this was true, but no longer. Before January 1, 1987 sales tax could be deducted as an itemized deduction. That deduction was removed in the 1986 tax law revision. However, if you pay sales tax on an item bought for a business and if the item qualifies as a business deduction, the cost of the item including sales tax can be deducted. Myth #5: Married couples are required to file a joint return Again, this is not true. All married couples are allowed to file either jointly or “Married Filing Separately.” However, “Married Filing Separately” usually results in paying more taxes. Married couples usually cannot file as "Single" or "Head of Household." Nevertheless, if a couple is separated and one has custody of a dependent child, the one who has custody can file as a head of household. A spouse can qualify as an abandoned spouse if he or she has lived apart from his or her spouse for a least six months of the year (this does not include time apart because of job or work-related obligations, military duty, or governmental duties) and has a dependent child living with him or her. An abandoned spouse can file as head of household. Conclusion Because of the yearly changes in the tax laws, rules that once were standard may no longer be in effect. For this reason, taxpayers should not assume that because a tax rule was once valid, it is still legitimate. For the most accurate information concerning any changes in the tax laws, we suggest that you consult with a local representative of the Internal Revenue Service, a tax consultant, your attorney, or a qualified CPA.
1 of 1
7/9/2008 9:37 PM
