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This week’s Tax Myths

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This week’s post focuses on common tax beliefs and what the real answer is.

Q: I worked for my neighbor and was paid cash under the table. Do I have to report that income?
A: All income is taxable unless Congress says it’s not. So, even if you did not receive a W2 or 1099 or any other reporting document, that income is still reportable and taxable.

Q: I own some stocks and the dividends are automatically reinvested. I never received the cash so that is not income, right?
A: If those dividends are received in a taxable account (i.e. not an IRA or 401k) then you had “constructive receipt” of the income when it was reinvested thus it is taxable to you and must be reported on your tax return. Look for a form called 1099-DIV from your broker.

Q: I plan to file an extension this year. Does that mean I have until October 15th to save up for my tax bill?
A: An extension is just more time to FILE, it is not more time to pay. Thus you should make the most accurate estimate possible of your tax liability and get that paid by April 15th.

Q: We started a business. So, the next step is to become an LLC, right?
A: Your Enrolled Agent can walk you through all the tax implications of becoming an LLC, but you should also consult with an attorney to understand what legal protections you need and speak to an insurance agent to see if an insurance policy will give you the coverage you need (and the premiums may be less than the annual $800 LLC fee).

Q: Why should I pay an Enrolled Agent (professional tax preparer) to do my return? With online software, I just follow the wizard and I get my tax return completed for a fraction of the price.
A:While the commercials do a great job of making tax preparation look easy (and the Turbo Tax commercials are entertaining), there is so much more to it. Enrolled Agents help you identify deductions and credits you did not know about, they help you make tax-wise decisions for the future, and they help you avoid audit flags. Enrolled agents help you achieve the lowest legal tax liability possible so you spend your money on you and not on taxes.

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