4 Tax Myths That Can Prove Costly

As tax-filing time approaches, well-meaning friends and colleagues often help each other out by exchanging tips about what is deductible and what is not.

Unfortunately, in many cases those tips are simply a retelling of tax myths – and anyone who buys into them could end up paying a heftier tax bill than necessary, either by taking a deduction they shouldn't, or not taking a deduction they should, says Rob Cordasco. www.cordasco.cpa, a CPA and author of A Framework for Growth: Smart Financial and Tax Planning Strategies Throughout the Entrepreneurial Life Cycle.

"Some are old-reliable myths that we see year after year, but on occasion a new one pops up," Cordasco says.

"Regardless, like any good myth, tax myths are debunked through facts." Here are four myths Cordasco says he often hears:

• Myth No. 1: A home-office deduction is a red flag that will trigger an audit. That's simply not true, Cordasco says, though it's easy to understand how this myth started. At one point a couple of decades ago, the IRS did target home office deductions because people were taking the deduction without meeting the "exclusive use" rules. "The exclusive use rules are pretty simple and straightforward," Cordasco says. "Does part of your home have dedicated office space, exclusively used as your primary place of business?" If the answer to that question is yes, then there's no problem with taking the deduction, he says. The IRS will not go out of its way to audit you simply because you did.

Myth No. 2: People employed by others can claim a home office deduction because of the pandemic. This is a newer myth, but just as wrong as the older ones, Cordasco says. "Even if you meet the 'exclusive use' rules, you cannot take a home office deduction if you are employed by someone else," he says. This law was changed with the Tax Cuts and Jobs Act of 2017, which made unreimbursed employee expenses like a home office nondeductible. The pandemic did not affect these rules, so if you are someone else's employee, you cannot claim a home office deduction, Cordasco says.

Myth No. 3: It's better to not file if you owe more in taxes than you can pay. Falling for this myth will make a bad situation worse, Cordasco says. "There are two types of penalties," he says. "Failure to file and failure to pay." The failure to file penalty is 10% of the unpaid tax regardless of when you file the return. Since you can't pay the tax, you're already going to get the failure to pay penalty. That's one-half of 1% per month, up to a maximum of 25%, until the unpaid tax is paid. "The last thing you want is to be charged with both penalties," Cordasco says.

Myth No. 4: If you file an extension, you don't have to pay your taxes until the extension due date. Technically, this one is true, Cordasco says. It just comes with a big caveat. The extension is an extension to file, not an extension to pay the taxes owed. That means the IRS will charge you a penalty for any unpaid tax after the due date of the original return, up until the extension due date. The penalty is half of 1% per month.

"These are just a few of the tax myths that get passed around from one person to the next," Cordasco says. "But when it comes time to file your taxes, you want to make sure you are acting based on things grounded in fact, not fiction."

Source: Rob Cordasco (www.cordasco.cpa), author of A Framework for Growth: Smart Financial and Tax Planning Strategies Throughout the Entrepreneurial Life Cycle, is the founder of Cordasco & Company, P.C., a boutique Certified Public Accounting firm. Cordasco is a CPA with more than three decades of experience. He holds a bachelor's degree in accounting from Spring Hill College in Alabama.