Top 5 Pieces of Tax Advice That Are Actually Wrong

1. Bad advice: Get an extension and you get more time to pay your taxes.

Why it’s bad: An extension is an extension of time to file, not an extension of time to pay. The IRS expects you to pay your taxes in full by the April deadline. When you get an extension, all you are doing is telling the IRS, “Hey, I need more time to get my records in order.”  Simply put, if an extension truly gave you more time to pay, wouldn’t everyone file an extension?

Better advice: If you are running short on cash or not sure how much to pay the IRS in April, best advice is to pay what you think you owe (as much as you can afford to).  Interest and penalties start to accumulate from the April due date, so the quicker you can pay your taxes, the less it will cost you in the long run.  Bottom line: Don’t wait until October to pay your taxes unless you enjoy paying the government extra.

2. Bad advice: Don’t get an extension because the IRS will audit you.

Why it’s bad: Not true, and following this advice could actually prompt the IRS to audit you.  If you’re rushing to get your taxes filed by the April deadline, but don’t have everything in order yet, you may be tempted estimate a few figures or leave off a W-2 you know you didn’t receive yet. These rush jobs actually raise the probability of an IRS audit and could cost you big bucks in penalties.

Better advice: If you need more time, get an extension. It is better to file later if it means your return will be correct.  The temptation to hurry and file on April 15th could lead to some big mistakes that cost you.

3. Bad advice: Buy a house because you’ll get tax breaks

Why it’s bad: If you’re #1 motivation to buy a property is the tax breaks, you may get a bad deal.  Sure you might get a tax deduction for the mortgage interest and property taxes, but this is a big MAYBE under the new tax laws.  Does it make sense to buy a home if you plan on moving in 6 months?  Is property overvalued in the area you live? Do you even qualify to itemize? Ultimately, if you enter home ownership merely for a tax break, you could end up with huge mortgage that costs you more than what you truly gain from becoming a homeowner.

Better advice: Think about your lifestyle and your individual tax situation. If home ownership makes sure for your lifestyle and fits your budget: go for it.  You may get a tax break as a result.  If home ownership doesn’t make sense for you, there are plenty of other ways to invest your money and still receive a tax break from it.  

4. Bad advice: Don’t claim a home office deduction because the IRS will audit you.

Why it’s bad: Not true. The home office deduction is a legitimate deduction for qualified business owners. The IRS isn’t looking to audit qualified business owners. In fact, starting in 2014 the IRS introduced a simplified method to make it easier to claim a deduction. The tax law is clear on who is entitled to a home office deduction, so as long you meet the requirements there is no reason to fear an audit.

Better advice: If you qualify, take the deduction.  Even if you were audited, as long as you file your return properly and accurately, you wouldn't lose the deduction.  Take the deduction if you qualify, otherwise, you could pay more taxes than your really need to.  Honestly, who’s goal is to pay extra taxes?

5. Bad advice: You don’t have to report money from a side gig

Why it’s bad: I hear this all the time. I didn’t get a 1099 or I was paid in cash so I don’t have to report that money on my taxes. The reality is if you earned income, its probably taxable.

Better advice: Report all of the income you earn, even if its just a side gig. Just because you were paid in cash doesn’t mean you aren’t required to report it on your taxes. If you don’t report it and the IRS discovers the unreported income, you may be looking at some severe penalties or worse, criminal charges.

The best advice of all

Don’t take tax advice from your mechanic.You wouldn’t ask your mechanic to manage your stock portfolio, or treat you if you had the flu.  So why would you take tax advice from that person?

Best advice: Get tax advice from a qualified professional, not the guy changing your oil.