There is a lot of mixed messaging about taxes in the United States. Many people believe certain tax myths that simply aren’t true. Without an experienced tax planner to navigate through the IRS rules, you’re likely to fall prey to various falsehoods. Let’s explore 10 of the most common misbeliefs:
1. There’s Nothing I Can Do About the Amount of Tax I Owe
A lack of personal agency is one of the more common beliefs. People think that the amount of tax they pay each year can’t change, and there’s nothing they can do to mitigate their options.
The complete opposite is true. There are a variety of options available to those who look into them. You may change your business structure, adjust the timing of your income, or use qualified retirement accounts to reduce the amount of taxes you pay.
2. There’s Nothing I Should Do About the Amount of Tax I Owe
Many people believe that engaging in tax planning to lower your tax liability is something only the unscrupulous do. That’s completely untrue. If you can lower your tax bill through legal means written into the IRS tax code, such as purchasing a home using a mortgage, there’s absolutely nothing wrong with that.
It doesn’t mean that you’re not fulfilling your patriotic duty. The only tax bill you must pay is what you legitimately owe. Reducing it through various options given by the IRS is quite fair.
3. Getting a Refund Means I’ve Won the Tax Game for the Year
No, you haven’t won the game. You’ve just allowed the IRS to hold your money for you with no interest charged. Winning the game means breaking even every year through tax planning tools designed to ensure that you pay no more than you owe at any time.
With the money you’ve allowed the IRS to hold for you, you could have paid off certain debts or invested more into your retirement.
4. All CPAs Are Tax Planning Experts
Unfortunately, this couldn’t be further from the truth. While all CPAs must pass an examination on taxation to achieve their licensure, they are generally not experts unless they regularly practice tax planning or file returns.
CPAs can work in several areas, including financial reporting, auditing, and general accounting. Taxation is only one field that a certain group of CPAs chooses to practice.
5. Tax Laws Are Written by Tax Experts
Politicians determine tax laws. The laws are written to fulfill whatever notion the politicians believe will be effective for influencing behavior or generating revenue at the time.
It’s common for taxes to be a platform for any politician, and those who are elected generally try to pass new laws to reflect their beliefs on how the tax system should work.
6. Tax Laws Are Always Changing, So There’s No Point in Planning for the Future
While it is true that tax laws consistently change, that doesn’t mean that you can’t plan for the future or take advantage of certain benefits that may be available to you now.
When you’re considering the impact of tax laws as they stand, look for the current advantages. For example, the tax cuts put in place to benefit businesses in 2017 are still there, although certain attributes have been adjusted in some cases.
While the Biden administration is considering increasing business taxes and has suggested new proposals, no law has yet been passed. However, those who work with a financial planner specializing in taxes can arrange their affairs now to be in a better position to minimize their tax liability should changes occur.
7. My Employer Doesn’t Offer A 401(k), So I Can’t Contribute to Qualified Retirement Account
Another myth that couldn’t be further from the truth. Even if your employer doesn’t offer a 401k, you can open your own qualified retirement account.
There are options available to everyone, including the Traditional IRA and the Roth IRA. You may also be eligible to open your own health savings account, allowing you to pay for medical expenses tax-free.
8. I Have A CPA, So I Don’t Need a Financial Planner
While a CPA may prepare your tax returns, that doesn’t mean they are thinking about your potential future tax liabilities. In most cases, a CPA isn’t going to provide you with a forecast of your taxes for the next five years.
Instead, they’ll ensure your return is accurate to the best of their ability and then move on to the next customer. On the other hand, a financial planner specializing in taxes can help arrange your financial situation, giving you less exposure to future tax liabilities.
9. It’s Too Early to Worry About My Taxes in Retirement
Many tax savings opportunities are capped annually, which means that the amount you can put towards your retirement in a qualified plan each year is limited — usually to about $6,500.
If you wait too long to start investing in a retirement plan, you’ll miss out on the opportunities to limit your tax liability in the early years and allow your retirement nest egg to grow over time.
10. $1,000,000 in My IRA Means I Can Withdraw $1,000,000 When I Retire
No, it doesn’t. When you withdraw from your IRA account, you’ll still be responsible for paying taxes on the money you take out. While the money does accrue interest and grow tax-deferred over time, you will pay taxes on every penny that you pull out in retirement. What remains unseen is what the tax rate will be at that time.
This information is intended to be instructional and is not specific tax or legal advice. The specific circumstances of an individual situation should be evaluated in determining the applicability of any of the recommendations in this document. Consult a tax or legal professional when making recommendations to a client.