Tax Truths and Tall Tales: Part Two
With something as complicated as the US tax code, it makes sense that a few tax myths have developed along the way. Often, these myths are centered on what is and isn’t deductible. Last month we explored whether pet expenses, commuting, rent, and charitable contributions are deductible; if you have not read part one of this series, click here to catch up. Let’s explore a few more examples that can help you sort fact from fiction.
Business credit card interest is deductible.
Fact. While interest on personal credit cards is not deductible, interest charges on business cards are. The IRS defines it as “an amount charged for the use of money you borrowed for business activities.” While this generally used to primarily refer to loans, it may also include business credit card interest.
All medical expenses are deductible.
Fiction. While medical expenses are a valid deduction, there is a giant caveat: only the amount that exceeds 7.5% of your adjusted gross income (AGI) can be deducted. Additionally, while the list of deductible medical expenses is actually quite long, there are a few limits to be mindful of, such as medical insurance premiums only being deductible for non-W2 employees. To learn more about what is and isn’t a deductible medical expense, click here.
There is a tax credit for saving for retirement.
Fact. While there are a multitude of tax benefits for different types of retirement account contributions, here we are specifically speaking about the Retirement Savings Contribution Credit. If you file for tax year 2020 with an AGI of $39,000 or less, you may earn a credit for as much as 50% of your retirement plan or IRA contributions up to $2,000 (or $4,000 if filing jointly). Learn more about it here.
Social Security isn’t taxable.
Fiction. If your only source of income is your Social Security check, it isn’t taxable. However, whether your Social Security benefits are taxable depends on your filing status and how much other income you receive.