When it comes to taxes (and especially to tax deductions) there’s a lot of misinformation floating around out in the world, particularly when it comes to tax deductions. After all, we all want to save a few dollars where we can. But many of those tax ideas have been accepted as fact, when they’re actually tax myths.
So, here are the top seven tax myths about deductions, and the truth behind them.
7 Tax Myths About Deductions (and the Truth Behind Them)
Tax Myth 1: Every dollar claimed in deductions, is a dollar you get back in your refund.
Unfortunately this is just not true (I wish it was!). Instead of a dollar-for-dollar refund, instead you’ll get a percentage of the amount of money claimed. In the best case scenario, you will get back 47% of the money you spent, or $47 out of every $100. And that’s assuming that you’re in the highest tax bracket. In the lower brackets that percentage will be between 22% and 35%.
Tax Myth 2: All deductions are good deductions.
Understanding the amount that you will have refunded to you when you make a deductions claim is important because it will help you understand where and when you should spend your money. Just because you’ll ‘get it back’ in your refund, doesn’t mean you should necessarily mean it’s a good buy. Because at the end of the day you’ll only get a small proportion of it back.
Deductions are only ‘good’ if they are necessary to support your life, boost your future income, build an asset or run your business. If it’s not a purchase that can do one of those things, then it’s sometimes a more financial savvy move to just pay tax on the income and bank the rest of the money allowing you to better manage your cashflow.
Tax Myth 3: Everyone is entitled to claim up to $300.
There’s an ongoing belief that everyone that files a tax return is entitled to claim up to $300 in deductions, despite not having purchased anything. Unfortunately, this is another claim that just isn’t true. What is true is that you don’t need receipts for claims of expenses up to $300. But you still have to have actually spend the money.
Tax Myth 4: You can claim your travel to work and back.
This is one that is sometimes, in very specific situations, true. You can claim travel between home and work if you are required to transport bulky tools or equipment and there isn’t a safe place to keep them at your workplace. But in most situations, you can’t claim the expense of travelling between work and home because these are considered ‘private expenses’ rather than ‘work expenses’.
Tax Myth 5: Coronavirus expenses, like gloves, masks and home schooling costs, can be deducted as work expenses.
This is another one that is partly true. There are some situations where you can claim protective gear, such as jobs where you are in close proximity to the public and where you are required to use those items to do your job safely. But for most of us, we’re purchasing these items for our private use, and we simply can’t claim them back.
And when it comes to setting up your kids for home schooling, those costs are always private expenses.
Tax Myth 6: You should always claim the maximum amount on all standard deductions.
There are some standard operating costs that business owners are allowed to deduct on their returns. And some of these have a maximum allowable amount, for example, $150 for clothing. But you can’t automatically deduct the $150 worth of clothes simply because you have to have clothes to go about your life. You can only deduct these if they are items specifically required for your job – for example nurse’s scrubs.
Regardless of amounts allowable, all your deductions must be directly used in your business and must tie directly to a related expense.
Tax Myth 7: You should try to find as many hidden deductions as possible.
With so many more people working from home, or having remote offices, deductions are changing. For example, now you can claim your home office and your internet as a deduction. But that doesn’t mean you should go and find every deduction possible or claim them to the full amount possible. Instead, you should focus on accurately reporting how much of your out-of-pocket expenses actually went towards your business.
You should also be careful trying to tie in ‘extra’ expenses. For example, you can’t write off your gym membership unless perhaps you’re a trainer at the gym. It’s always a good idea to look beyond traditional expenses when it’s closely related to your business. But not when it isn’t.
Talk to Your Tax Agent
If you want to understand the best approach when it comes to your tax planning, don’t rely on tax myths – give us a call. We can help you find the deductions that make sense for you because they’re the things you need to run your business or your life. And we can help you put in place a tax minimisation plan that will benefit you overall.
For more information on tax myths and tax deductions, get in touch. We’re here to help.