A recent informal poll of enrolled agents (federally-licensed tax practitioners) revealed many common misconceptions among taxpayers. Included on the list were:
"I had a really big loss in the stock market this year, so I won't owe any income taxes." Deduction of capital losses against ordinary income is limited to $3,000. Also incorrect: "I traded some stocks and have a loss/didn't make any money, so there's no need to report those sales."
"They paid me in cash and I don't have to report that, right?" If it's income, you must report it.
"I'm too young/too old to have to pay taxes." Even your dependent high schooler has to file a return after earning income over $5,700. And, Uncle Sam may still be interested in your return after you're dead. A personal representative of the decedent is required to file a tax return and the estate tax when due.
"If I didn't receive a document about it, it's not taxable." A good preparer will provide you with a checklist that reveals missing documents, but too often taxpayers who are preparing their own returns or dealing with an unlicensed preparer will fail to include important information simply because they missed something in the mail, or because the document was never mailed.
"Income earned in a foreign country is not taxable." Taxpayers are required to report all earned income to IRS, no matter where it was earned.
"You don't have to report gambling income, and besides, I lost." Gambling losses do not net out against income. For the non-professional gambler, income goes on page one of Form 1040; the losses go on Schedule A and are not subject to the 2 percent floor, but cannot be greater than the winnings. Therefore, the "net" sheets many casinos provide individual taxpayers are worthless.
"Income from my hobby can't be taxable." The operative word here is "income." It's taxable.
One of this year's widest-spread misconceptions came in the wake of the IRS announcement that employers must now report medical insurance paid for employees. Duped by a viral e-mail, taxpayers across the country mistakenly believe that medical insurance must now be reported as income and taxed. Not true. The expense will be reported on the W-2, and not added to income.
Finally, a lot of taxpayers hold misconceptions regarding paid preparers. The notion that all tax preparers do is fill out forms neglects the real value of a paid preparer: They keep up with myriad tax laws and regulations and have the expertise to know how to apply these rules for the benefit of the taxpayer. And, no matter who prepares the tax return, the taxpayer is the one who is legally responsible for whatever appears on his or her return, making it a doubly good idea to hire a licensed preparer.