Have You Gotten Bad Tax Advice?

Have You Gotten Bad Tax Advice?

Let’s talk about the oh-so-fascinating U.S. Tax Code, shall we? It’s not just about collecting those hard-earned dollars from your pockets. No, no! It’s a glorious tool used by the Government to shower lower-income individuals with all sorts of social benefits. We’re talking about the earned income tax credit, child tax credit, and even health care subsidies. It’s like a never-ending parade of generosity!

But wait, there’s more! The Tax Code is also here to save the planet. Yeah, you heard me right. We’ve got some government-sponsored programs in place to combat climate change. So, if you’re a proud owner of an electric vehicle, a home solar installation, or home energy-saving improvements, guess what? You get to enjoy some fancy tax credits. Isn’t that just dandy?

Now, before you get all excited and start doling out tax advice left and right, let me drop a truth bomb on you. The Tax Code is as complex as navigating a labyrinth blindfolded. It changes more frequently than a chameleon changes colors. So, here’s a pro tip: relying on your friends, relatives, or the internet for tax advice is about as risky as playing with fire. Trust me, you don’t want to mess with the IRS or miss out on those sweet tax benefits.

Let’s take a look at some prime examples of bad tax advice floating around out there. Brace yourselves for some mind-boggling misinformation!

If your divorce or separation agreement says so, you can claim your child as your dependent.

Nope, sorry. The IRS doesn’t give a hoot about what your state court says. It’s the lovely IRC Sections 151 and 152 that determine who gets to claim that child for federal income tax purposes.

If you pay child support you are entitled to claim the child as a dependent.

Ha! Not even close. The custodial parent is the big boss here, unless they release that dependency to the non-custodial parent. And just so you know, the IRS defines the custodial parent as the one with whom the child spends most of their nights.

An employer can avoid payroll taxes by treating an employee’s compensation as a gift.

Seriously? Do people actually believe this? Newsflash, folks: gifts are excluded from gross income, but when it comes to an employer giving something to an employee, it’s a whole different ballgame. That can’t be excluded as a gift, according to good old Code Sec. 102(c)(1). But hey, if you’re into de minimis fringe benefits, those little buggers are excluded. Just make sure their value is so small that accounting for them is practically impossible.

You can only deduct medical expenses for the taxpayer, spouse, and dependents.

Ah, the sweet sound of almost being right. Yes, that’s generally true, but buckle up for a twist. When it comes to deducting medical expenses for a dependent relative, the gross income test can take a hike (IRC Sec 152(d)(1)(B)). Oh, and if you’re dealing with divorced or separated parents and their qualifying children, each parent can deduct the expenses they pay. As long as the child is a dependent of one of them, of course. Complicated? You betcha!

You get a charitable contribution if you donate the use of your time-share week to a charity auction.

Hold your horses! Donating the use of something doesn’t count as a gift of property, my friend. It’s just a fancy way of saying you let someone use it without charging them. And guess what? That means it’s not deductible. Sorry to burst your bubble, but that’s how the cookie crumbles according to Rev Ruling 70-477, I.R.B. 1970-37.

If you pay your household help in cash you can avoid paying FICA.

Oh, sweet ignorance! The IRS sees right through that sneaky tactic. Household help is considered employees, my friend. And when it comes to employees, they’re subject to Social Security and Medicare taxes (FICA) once they cross a certain threshold. Unless you’re dealing with repairmen, plumbers, or contractors, those folks are not counted as household employees. Good try, though!

Health savings account (HSA) funds can only be used for medical expenses.

Oh, honey, you’re partially correct. HSAs are all about high-deductible health plans and paying medical expenses. But guess what? There’s no strict requirement that HSA distributions must be used for medical expenses. However, those distributions come with income tax and a lovely 20% penalty tax. Unless you’re 65 or older, then you can withdraw the funds penalty-free. But hey, you still gotta pay tax on that nonqualified distribution. Life’s full of trade-offs, isn’t it?

You only must report and pay tax on income more than $600.

Sweet summer child, how wrong you are. Sure, if you’re in a trade or business, you gotta file an information return for payments of income to independent contractors or service providers. But let me clear the air for you. Income of $600 or less is not some magical land of non-taxability. Nope, not even close.

You don’t have to report interest income if your bank hasn’t sent you a Form 1099-INT.

Oh, how I wish that were true! But nope, sorry to burst your bubble again. Even if your bank decides to skip out on sending you that Form 1099-INT for interest amounts under 10 bucks, you still gotta include that interest in your income if it’s 50 cents or more. It’s a cruel world, my friend.

You can help friends and family with interest free loans with no tax consequences.

Honey, that’s not how it works. According to our lovely tax code (Sec 7872), if you loan more than $10,000 interest-free, it’s considered a gift. Yep, a good old gift. And guess what? The amount of that gift is calculated based on an applicable federal rate (AFR). So, the borrower gets to enjoy the imputed interest, which might be tax deductible if it qualifies. Meanwhile, the lender has to treat that interest as good old investment interest income. Oh, the joys of generosity!

Older people should change the title on their home to their child.

Yeah, let’s not go down that road, my friends. That so-called genius move is considered a gift, which means a gift tax return is required. But wait, there’s more! If the child eventually sells that home, they’ll have the same gain as the parent would’ve had. Oh, except the child won’t qualify for the $250,000 home sale gain exclusion. Ouch!

But hey, if the parent holds on to that home and the child inherits it after the parent kicks the bucket, the child’s basis becomes the fair market value at the date of the parent’s death. That could mean no taxable gain and maybe even a delicious deductible loss. Isn’t inheritance just fabulous?

You can deduct the cost of attending a medical conference related to a dependent’s disease.

Well, you’re kinda right, but not really. You can deduct the conference registration fee and travel costs because they’re primarily for the dependent’s medical care, and your presence is oh-so-essential. But hold up! Those sneaky meals and lodging expenses don’t make the cut. Nope, they’re not deductible because your dependent didn’t receive medical care at a licensed facility. Bummer, right? (Rev Ruling 2000-24, 2000-19 IRB)

If lead-based paint is discovered in your home you can claim a medical deduction for the cost of repainting your home.

Now that’s what I call an exaggeration! You can only include the cost of removing lead-based paint from surfaces in your home if it’s to protect a child who has or who has had lead poisoning. But wait for it, those surfaces must be in poor repair or within the child’s reach. Repainting the scraped area? Nope, not deductible, my friend. You’ll have to dig deeper into your pockets for that one. (IRS Publication 502, page 10)

You can sell your used electric vehicle to an individual and get a tax credit of $4,000.

Oh, bless your heart, but you’ve got it all wrong. The buyer gets the credit, not the seller. And guess what? That credit is the lesser of $4,000 or 30% of the vehicle’s selling price. But wait, there’s more! You can only get that credit if you purchase the vehicle from a dealer, not some private party. So, no luck there, my friend.

Investments in foreign countries are not subject to U.S. taxes.

If only life were that simple. U.S. citizens and resident aliens are taxed on their worldwide income. Yep, you can’t escape Uncle Sam’s reach, no matter where those dollars come from.

Homeowners can claim a credit for purchasing and installing solar electric systems on their home.

You’re almost there, my friend. You don’t actually have to own the property to qualify for the credit. All you need is to be a “resident” of the home. So, if you’re cozying up under that solar-powered roof, you might be in for a sweet little credit. Kudos to you!

There is a “standard” amount that can be claimed as a charitable contribution.

I wish life were that easy. Only actual amounts donated to qualified charitable organizations can be claimed as eligible charitable contributions. And guess what? The tax man has some stringent substantiation rules for both cash and non-cash donations. So, no shortcuts here, my friend.

A U.S. citizen married to a non-resident alien cannot file a joint return.

If a person who is a nonresident alien at the end of their taxable year is married to a U.S. citizen or resident, they can be treated as a U.S. resident for income tax purposes. Isn’t that exciting? By making that oh-so-special election, they can file a joint return. But remember, there’s always a catch. Filing jointly means you’re both responsible for the tax liability on that return. No taking the easy way out!

 

Phew! That was quite a ride through the land of bad tax advice. Remember, my friend, always consult with a qualified tax professional or refer to official IRS publications for accurate and up-to-date information. The tax code is a treacherous maze, but with the right guidance, you can navigate it safely and make the most of your tax situation. Good luck out there!