3 Things Too Many People Get Wrong About Taxes

Taxes are something all of us have to deal with year after year. And unfortunately, there's a fair amount of misinformation about taxes. Here are a few tax matters a lot of people don't understand, but should.

1. You should aim for the largest refund you can get

As of April 21, 2023, the average tax refund for 2022 was $2,753. If you got a large refund this year, you no doubt enjoyed seeing that money hit your checking account.

But one trap you don't want to fall into is erring on the side of having more tax withheld during the year so you can end up with a larger refund. In that scenario, all you're doing is setting yourself up to wait longer to get your money.

Remember, a tax refund is not a gift from the IRS. When you get a refund, all the IRS is doing is returning the money it was supposed to give you initially. So rather than celebrate a large refund or try your hardest to snag one every year, your goal should be to score as small a refund as possible.

To be clear, most tax-filers either get a refund when they file a tax return or owe the IRS some money. It's very, very difficult to get your taxes exactly right during the year to the point where you're not owed anything or you're not writing out a small check.

But remember, if you get a refund of $2,400, it means you could've gotten access to an extra $200 a month during the year, only instead, you didn't. That's hardly beneficial to you.

2. You'll be audited if you itemize deductions

A good number of tax-filers itemize deductions on their tax returns because doing so results in more savings. It could make sense for you to itemize if you pay a lot of interest on a mortgage, have high property taxes and state income taxes to write off, and have a lot of expenses to deduct related to side hustle or freelance income.

But one thing you don't want to do is avoid itemizing because you're afraid of getting audited. If you claim legitimate deductions, that's less likely to happen.

And let's say you do get audited. Maybe the IRS wants to question the $8,000 in supplies for your business you deducted. All you have to do is submit your receipts, and the IRS will see that you did, indeed, purchase the items you claim you did.

3. You'll be taxed more on all of your income if you're a higher earner

You may have heard that the higher your income, the higher your tax rate is. That's true, but only to some degree.

Our tax system works on a marginal basis, which means you pay a higher rate of tax on your highest dollars of earnings. However, the tax bracket you fall into applies to your highest dollars of income only.

Let's say you're single and earn $100,000. That puts you in the 22% tax bracket for 2024. But that bracket, for singles, applies to income of $47,151 to $100,525. You're not being taxed 22% on your entire $100,000 salary. You're only being taxed at that rate on earnings of $47,151 to $100,000.

It's easy to get bogged down by misinformation when it comes to taxes. But a better bet is to talk to a tax professional about ways to save money on your IRS bills every year. A professional can help you not only understand how the tax system works, but how you can use certain provisions to your financial benefit.