Many myths about the IRS and the tax code have recently been amplified online. Here are common myths that could leave you with an expensive tax surprise if you believe them.

MYTH: /miTH/ (noun) – a widely held but false belief or idea

Common tax myths

1. Retirement money is always tax-free
2. The government won’t find out about a big gambling win
3. Government benefits like unemployment and Social Security aren’t taxable
4. If you work from home, you can write off my office expenses

Lessons learned

You have retired and withdrawn from a 401(k), fully expecting you won’t owe income taxes. Unfortunately, money withdrawn at any age from a 401(k) or your traditional IRA incurs income taxes at your current tax rate. Understand how money in your retirement accounts is taxed when withdrawn. Some will have income taxes, some could incur early withdrawal penalties, and others incur no tax!

The feds and most states consider gambling winnings to be taxable income. The IRS generally wants about a quarter of your winnings from sweepstakes, casinos, bingo, keno, online sports betting, etc. Casinos and other betting entities inform the IRS of your winnings over certain thresholds. So, it is always best to keep track of your winnings. Gambling winnings fall under tax rules just like other forms of income. Deducting gambling losses is possible, but it has limits subject to strict regulations. For example, you must itemize deductions on your tax return if you don’t declare yourself a self-employed professional gambler.

Unfortunately, unemployment and Social Security benefits are usually taxable. Unemployment benefits are taxed at your standard tax rate as income at the federal level and in some states. Social Security is taxed, but in a much more confusing way. Supplemental Security Income payments, on the other hand, are not taxable. Plan ahead to mitigate the tax shock. You can have taxes withheld from your unemployment benefits so you don’t have to pay a lump sum when you file your return. With Social Security benefits, understand when and how they can be taxed since up to 80% of these benefits could be subject to income tax by the federal government.

You can only deduct home office expenses if you operate a business out of your home. If you’re an employee, you’re out of luck. If you run a business exclusively out of your home, there are still hurdles to clear before you qualify for the home office deduction. Tax rules can be complex, even for something as simple as a home office deduction.

Tax law help

If there’s one common theme here, tax laws can be complex even when they seem simple. When in doubt, ask for help. Contact our RRBB advisors if you have questions or need assistance.