Busting 4 Myths About Income Taxes
NEW YORK ( MainStreet) If there's one subject people love to complain about, it's taxes. No one enjoys looking down at a pay stub to see that huge chunk of income deducted. Yet in a recent survey by GOBankingRates , a whopping 79.1% of respondents admitted they aren't sure how their income tax dollars are used.
And who can blame them? At an ungodly 3.7 million words , it's no wonder few Americans have familiarized themselves with the contents of the U.S. Internal Revenue Code. It's boring, it's complicated, and most troubling, it's always changing.
One thing that probably won't change anytime soon, however, is the confusion Americans feel over taxes, especially with myths and misinformation that continue to circulate. So before you believe the next "fact" about filing, take a look at four common myths about taxes -- busted.
Myth # 1: 47% of Americans pay no taxes.
It was the statistic that came back to bite 2012 presidential candidate Mitt Romney hard: 47% of Americans don't pay federal taxes.
The truth is while the Tax Policy Center estimated 46.4% of households pay no federal income tax, it also noted that close to two-thirds of those households did pay federal payroll taxes for Social Security and Medicare. Further, two-thirds of the untaxed households were elderly, close to the rest earned less than $20,000 per year. Not to mention, it's nearly impossible to avoid federal taxes on common expenses like gas, alcohol and tobacco products.
Myth #2: Your tax bracket is the percent you pay in taxes.
Your tax bracket definitely affects how much of your income is taxed, but not in the way you might think.
Marcus Dickerson, accredited asset management specialist for FMW Financial Advisors, LLC, said many people don't understand the progressive nature of the U.S. tax system, believing that once a certain tax bracket is reached, all income is taxed at that percentage.
"I've had discussions with several clients over the years who wouldn't get a summer job, because they thought it would push them into a higher tax bracket and cause all of their income to be taxed at that rate," said Dickerson. "The truth is, even the highest of earners in this country have the benefit of having a portion of their income taxed at 0%, a portion at 10%, a portion at 15% and so on."
Myth # 3: You will only get audited if your tax return is wrong.
Under 1% of individual tax returns are audited, though Janet Novak of Forbes noted that those chances increase once your income exceeds $200,000 annually. Even so, it's not always fudged numbers or "creative" accounting that lead to audits.
In many cases, the IRS simply wants to verify information and often, it turns out that information was reported accurately.