It’s the two words that everyone dreads: Tax season. It can be an incredibly confusing and stressful time of the year. All those forms to fill out and store away, all that information you have to sort through, the fear that an honest mistake could get you hit with IRS penalties and fines. If only we could hibernate through these months like a bear! But alas, Benjamin Franklin was right. “In this world nothing can be said to be certain, except death and taxes.” Tax season affects us all.
At Hacker Accounting, we know how high stakes this time of the year can feel. That’s why we do everything that we can for our clients to put them at ease and guide them through this stressful time. And part of the reason why it can be so stressful is that there are so many misconceptions that surround tax season. People end up ignoring crucial details or doing the wrong things and causing themselves serious problems down the line. Here are five of the most popular misconceptions about tax season.
Misconception #1: An Extension Postpones Your Payment
When you file for an extension, you are filing for an extension on the time to file. What you are NOT doing is getting an extension on the time to pay! This can be a little confusing, but this is a misconception that many people end up shooting themselves in the financial foot over.
An extension will push the file date forward but it doesn’t change the date where a payment to the IRS is due. If you owe the IRS $5,000 on April 18, your extension won’t suddenly make it due three months later. You’ll still be subjected to the same penalties and interest that you would accrue for missing a payment. In some cases, the IRS may grant a six month grace period to pay back your debts but this is by no means a guarantee.
Misconception #2: You Don’t Have To Report Cash Income
All income must be reported. That includes cash income. So if you work a job where you receive supplemental cash income like tips or have employees who are receiving that kind of income, you have to report it. Just because the income isn’t recorded in the form of a paycheck doesn’t mean it isn’t subjected to the same tax laws and requirements that govern your payroll.
Misconception #3: Income Earned In Foreign Countries Is Not Taxable
We hate to break it to all you wandering spirits and citizens of the world but this is not the case. Income is income, whether it’s made here or on foreign soil. Reporting income made in a foreign country is very important: The penalties for failing to report this kind of income can be HUGE.
Misconception #4: The Money I Make From My Hobby Isn’t Taxable
Remember these magic words because they will save you from penalties: Income is income. Just because you make money from something that isn’t your “job” doesn’t mean it’s not taxable. Any activity you engage in that generates any kind of income you must report. It doesn’t matter if you’re selling paintings on the side or running a neighborhood lemonade stand, if somebody is paying you for for it you need to let the IRS know.
Misconception #5: “I Don’t Need To Report Stocks I’ve Sold That I Took A Loss On”
You have to report the sale of any stocks you have. It doesn’t matter if they turned a profit. Even if you made no money or took a significant loss on them you still have to report those sales. You and your broker will have to provide a “cost basis”, which is usually the stock’s purchase price, to the IRS.
Got any questions about taxes? We can help with that! Give Hacker Accounting a call at 602-375-5251.