Myths are pervasive in all areas of life, but federal tax refund myths are often based on misinformation and outdated knowledge. So let’s break down these myths and get to the truth behind them.
Myths about the Refund Process
There are tons of tax refund myths that center on the process of receiving that refund once you’ve filed. There are several factors affecting this: when you file, how large and complicated your returns are, whether you’ve paid each tax bill (state, federal, local, etc.), e-filing versus paper filing, and more. Here are some of the most common federal tax refund myths about the process, according to the IRS.
Myth: Calling the IRS or your tax software providers will provide a more accurate refund date.
The best way to find the status of your federal tax return is to check out the IRS’s Where’s My Refund? tool or the IRS2Go app. Your tax preparer and the IRS phone representatives will not be able to give you more accurate information than what you can find on your own using the abovementioned tools.
Myth: The Where’s My Refund? tool is wrong because there’s no deposit date; the refund amount is lower than expected.
Updates to the IRS tools are made once a day. If there is no deposit date shown yet, you can most often expect your refunds in 21 days, unless the IRS needs more information or has questions for you about the information you filed.
And as for the refund amount: the tax code is constantly changing, as is your personal and business income, revenue, taxable assets, and so much more. Most often, the IRS will send you a letter detailing any changes to your refund or tax bill. The refund amount can also be low due to outstanding financial obligations you have with the IRS.
Myth: My tax extension means I have more time to settle my tax payments.
This is one of the most popular tax refund myths we hear. An extension is not meant to give you or your business more time to pay your taxes – there are several due dates throughout the year and at the end of the year. These deadlines are not flexible. However, when you receive an extension, you can file your taxes at a later date.
Myths about Certain Tax Bill Items or Refund Topics
Because the tax code is complex, debunking federal tax refund myths is often more about sharing updates from the IRS and helping individuals and businesses stay on top of those changes.
The word “audit” is thrown around as if you or your business is being watched by the IRS, and the first moment you make a mistake, they swoop down and slap you with a penalty. This isn’t the case, but let’s go through some tax refund myths that focus on the refund and filing information itself.
Myth: Home office deductions mean instant audit.
As we mentioned, this myth about home office deductions was once very near the truth of the matter, but since home office deductions have changed drastically in the last few years, and there are many more people with side hustles or online businesses they run out of their homes, the practice of the IRS automatically auditing anyone who claimed this deduction has long since been retired.
Myth: Students don’t have to pay taxes.
This myth is partially true: any student that is claimed as another taxpayer’s dependent does not have to pay taxes if they earned less than $12,550 in that tax year. However, it is still often beneficial for students to file a tax return, because their employer was likely withholding taxes from each paycheck, and that student is entitled to a refund.
Myth: Writing off business expenses is a loophole in the tax code.
Expensing is not considered a loophole – it is an intentional part of the tax code. In fact, many tax experts agree that expensing the deductions and refunds that stem from them are a highly desirable aspect of the U.S. tax bill system.
It allows businesses to take those funds and recoup them in ways that stimulate the economy or work their way into the pockets of their employees.
Myth: Large businesses are the only ones that can take advantage of healthcare tax credits.
Because employer-sponsored healthcare is often not feasible for a small business to offer their employees, many people believe that these ACA healthcare tax credits simply do not apply to them.
While the ACA does not require businesses with fewer than 50 employees to sponsor healthcare for their staff, you can still offer it to your employees. This coverage is offered through the SHOP marketplace and your business must meet these criteria:
- Have fewer than 25 full-time or equivalent employees
- Pay under $50,000 per year in average salaries
- Pay a minimum of 50% of employee premium charges
If you meet these criteria, your business can receive a tax credit for 50% of the premiums it paid for your employees (or up to 35% if your business is classified as tax-exempt.)
Other Tax Refund Myths
We also wanted to share some general tax refund myths that may have you changing your tax prep strategy for next tax season.
Myth: Receiving a large tax refund is the best-case scenario.
No one wants to owe taxes at the end of the year or during the tax season. So, naturally, many of us think that receiving a large tax refund is the best tax news we can get.
This isn’t exactly the case. While yes, getting some money back after you file is better than having to write a check to the IRS or the state, it also means you’ve been giving the government an interest-free loan all year.
That money that you receive every year is being withheld throughout that year, which prevents you from using that money to pay expenses, invest in new opportunities or real estate and earn interest on those dollars for yourself.
Myth: If you create an LLC, your lifestyle expenses can be written off your taxes.
This is another of the most pervasive tax refund myths (fueled partly by social media videos encouraging individuals to try this “life hack”).
Unfortunately, personal expenses are never tax deductible. You can deduct legitimate expenses you’ve paid in the course of your business dealings, so long as they are “ordinary and necessary.” That means your expense must be standard and accepted within your trade or industry – simply creating an LLC doesn’t automatically make every expense one that can be attributed to your business on your tax returns.
Organize Your Tax Forms to Lower Your Tax Bill & More
Working through your taxes based on hearsay and tax refund myths is similar to trying to remember your grocery list without writing it down. You’ll lose things, forget others, and feel frustrated by a process that doesn’t work for you.
With eFile360, your tax forms are organized and easy to search year over year. Taxes are hard enough without having to sift through mountains of paperwork, USB drives, and other clutter to get what you need. This tax season, you and your business deserve better.
Keep the myths out of your business taxes, and let us help you use the truth in the tax code to create helpful tax bill solutions. Sign up for a free eFile360 account today.