When it comes to taxes, myths abound. And it's no surprise. Like the idea of coming up against Bigfoot or fearing your plane going down in the Bermuda Triangle, the notion of tangling with the IRS is a pretty scary concept. It doesn't help that taxes are complicated, which makes it hard to sort fact from fiction.
But you'd be smart to start sorting because when you believe a myth, it can end up hurting you. And doesn't doing your taxes hurt enough without you making things worse?
So if you're looking to improve your filing experience this year, here are a handful of tax myths that quite a few people fall for, according to tax experts.
Your work clothes are tax-deductible. Theresa Shea, a tax and accounting professor at Widener University in Chester, Pennsylvania, as well as a certified public accountant, says she has had quite a few clients come into her office believing that any type of work clothing is deductible.
"Some clothing is tax-deductible," Shea says. "Most is not. The only type of clothing for which one may take a deduction is clothing that is specifically required by your employer and is not suitable to wear outside of work."
She recalls a client who once came in with a pile of receipts for new suits and dry cleaning, believing everything was deductible because his new job at a casino required him to wear a suit every day. When Shea informed him that it wasn't all tax-deductible, he stormed out of her office.
You can estimate your numbers since you can always file an amended tax return later. There is some truth here. You can file an amended tax return if you learn that you made a mistake on your taxes.
But relying too heavily on that strategy, and believing that it's perfectly fine to estimate because of the ability to amend, is a big mistake, says Eric Green, a tax attorney and partner at Green & Sklarz, a law firm in Stamford, Connecticut.
Because in the technical sense, if you estimate your numbers, Green says, "the reality here is that the taxpayer just filed a false return, a return they know is false, which is technically a crime."
Furthermore, Green says the likelihood that you'll actually file an amendment later is slim. Odds are, he says, you'll forget about it.
"At least until an IRS exam is triggered," he adds. "If numbers are missing, then file it and tell the IRS it contains estimates, and make sure the actual correct return gets filed."
Filing an extension gives you extra time to pay. The extension gives you extra time to prepare your taxes, but if you owe money, and you file six months later, it is more expensive than paying in April, according to Jordan Niefeld, a certified public accountant and certified financial planner based in Miami.
Niefeld was a tax CPA for eight years and says that many clients believed that if they filed a six-month extension on their taxes on Oct. 15 instead of the standard April 15, no harm, no foul, from a financial perspective. But you are hurting yourself, Niefeld warns.
"You may file on Oct.15, but the clock on the interest started on April 15," Niefeld says.
In other words, extensions are fine if you need the time to get your taxes together, but not as a way to save money.
If there is no record of the money, it doesn't need to be reported. You wish. We all wish. But, no, that's the not case, Shea says.
Granted, if you find $10 in the street, and you pocket it, realistically, the IRS will never know, although, yes, technically you should report it. But if you're earning money, and you don't report it, that's a serious no-no. (Most tax attorneys would probably come up with a more technical term, like a "serious infraction.")
Andrew Oswalt, a tax analyst for the tax-preparation software provider, TaxAct, says this myth often trips up people who are making money on the side, say by driving once a week for a ride-sharing service like Uber.
"Even if you have a full-time job as a software engineer, botanical chemist or auto repair mechanic, you're still considered self-employed by the IRS for purposes of your side job," Oswalt says.
So assuming you made more than $600 in any given job, your employer will send you a Form 1099-MISC, Owalt says, and the money on that form will be subject to self-employment taxes. But on the bright side, he says, you may be able to deduct expenses related to that side job.
Making more money bumps you into a higher tax bracket. People who are close to reaching a new tax bracket may suddenly be worried that because they're making more money, they're going to be hit with more taxes than ever and they may even wonder if they would have been better off not getting that raise or promotion. Not so fast, says Benjamin Sullivan, an enrolled agent and certified financial planner with Palisades Hudson Financial Group in Scarsdale, New York.
"The pain isn't as bad as some people think," Sullivan says. "Taxpayers sometimes mistakenly believe that receiving additional income can result in all of their income being taxed in a higher tax bracket. However, only the income exceeding the tax bracket threshold is taxed at the higher rate."
Sullivan has an example that may offer more clarity. "A married taxpayer earning $500,000 of ordinary income would be in the highest tax bracket, which is 39.6 percent in 2015, but only the portion exceeding $464,850 would be taxed at that rate," he says. "In other words, the first $464,850 is still taxed at lower rates."
But do yourself a favor and don't share that "problem" with your friends in a lower tax bracket. You will be mocked.
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