Tax myths can spread quickly, leading to costly mistakes or missed opportunities. Here are several common tax myths along with best practices to help you stay grounded in reality.

Common tax myths

1. Myth: Moving into a higher tax bracket means you’ll take home less money.

The U.S. tax system is progressive, meaning your income is taxed in layers. There are currently seven different layers, with tax rates ranging from 10% to 37%. When you enter a higher tax bracket, only the portion of income above the bracket threshold gets taxed at the higher rate, not your entire income. Know your marginal tax rate! This is the tax rate on the next dollar you earn. By understanding this, you can make your own calculations about the impact of any additional income you earn.

2. Myth: Getting a tax refund means you did something right.

A tax refund means you overpaid your taxes. It’s your money, coming back to you – without interest. Getting a big refund might feel great, but from a cash flow perspective, you’re better off adjusting your withholding so you keep more of your paycheck each month. Review last year’s tax return and update the numbers to reflect your current year’s situation. Factor in the latest changes, such as tax-free tips, tax-free overtime, and increased standard deductions, including the new $6,000 deduction for seniors. After making these adjustments, please review your paycheck withholdings to ensure they are aligned.

3. Myth: You can deduct all your expenses if you’re self-employed.

Well, not quite. While being self-employed certainly opens up more deduction opportunities, not every expense qualifies. Only ordinary and necessary business expenses can be deducted. That family trip overseas doesn’t qualify unless it was genuinely work-related (and even then, only parts of it might qualify). Set up a dedicated business bank account to handle all income and expenses related to your work. Then establish a regular schedule to transfer funds into your personal account for all non-business spending. And don’t commingle funds with your personal expenses. The IRS may be quick to throw out all expenses if they see this occurring.

4. Myth: You don’t have to report income if you didn’t receive a Form 1099.

If you earn money, the IRS expects to hear about it, regardless of whether you received a Form 1099. Many people assume that if a client or gig platform doesn’t send you a 1099, then that income doesn’t need to be reported on your tax return. But that’s not how it works. The tax code requires you to report all income, no matter how it’s documented – or if it’s not documented at all. Keep a list of past 1099s to help you remember which clients or platforms have paid you before and to double-check if you earned income from them again this year.

Have questions?

Please contact our RRBB advisors if you have any questions about your tax situation.