Every American has to file income tax, but many are ignorant of basic aspects of the US tax law. Consequently, they lose large amounts of money by believing commonly held lies, instead of investigating the reality of the law for themselves. There are at least five commonly held beliefs about taxes that hold an inexplicable grip over the American consciousness, to the detriment of most tax-paying Americans.
The first of these beliefs is that students don’t have to pay taxes. This is just plain false. Students have to report their income and pay the same taxes as anyone else. Although students get certain tax credits, namely the Hope Credit and the Lifetime Learning Credit, their income, nonetheless, must be taxed. A student who earns $6,000 in 2008 working part-time, and whose parents then claim him or her as a dependent, has to file taxes or else be subject to even bigger penalties from the IRS.
Conversely, another false, but popular, idea is that children who work can’t be claimed as dependents. US citizen parents or legal guardians who fund more than 50% of a child’s living expenses can claim that child as a dependent no matter how much money their child is earning – even if the child is earning millions of dollars. The child just has to be under 18 years of age, or under the age of 24 and in school full-time.
Indeed, parents could apply for a tax exemption for their child – as distinct from claiming the child as a dependent – if the child doesn’t earn enough. If the child makes less than $3,500 in 2008, the parent or guardian can apply for an exemption with a value of $3,500.
A third idea is that someone has to be older than 55 in order to sell his or her house without paying tax. The fact is, the law has changed. In the past, people over 55 could, indeed, sell their principle residence and subtract up to $125,000 of the profits from taxes. Nowadays, anyone can sell his or her house and subtract up to $250,000 of profits from his or her taxes. The house in question has to have been the person’s principal residence for at least two years, of the last five.
A fourth accepted falsehood is that people can deduct sales taxes on purchases from their state and federal income tax. Although, since 2004, people have, indeed, been able to deduct sales taxes from either state income tax or federal income tax, the law does not allow people to deduct sales taxes from both. Some states don’t have state income tax, so this is not a problem. However, watch out: the 2004 legislation is set to expire at the end of 2008 unless Congress acts.
The final great lie is that married people should and must invariably file their income tax return jointly. Filing one’s taxes as “Married Filing Separately” is always a possibility, and in some cases results in savings – although in some cases, it results in the opposite. Calculate both possibilities: usually, filing separately is useful if one spouse makes significantly more money than the other.
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