5 all-too-common myths about taxes people refuse to stop believing
- Ramit Sethi is the author of the New York Times bestseller "I Will Teach You to Be Rich" and writes for more than 1 million readers on his website, I Will Teach You to Be Rich.
- He's found that many people seem to be holding onto myths about taxes, no matter how far they are from the truth.
- Those myths include the fact that getting a tax refund is always bad, that it's better to earn less so you can pay less in taxes, and that rich people don't pay any taxes.
In my life, I've learned that people really, really like to spout a lot of nonsense about things they don't fully understand, including about taxes and how they work.
And I've found that they like being told they're wrong even less.
My goal is not just to prove people wrong, but to help you make better, informed decisions about your taxes, based on facts.
Here are five common myths about taxes that people get wrong.
TAX MYTH #1: Getting a tax refund back is bad
Anyone ever tell you that getting a tax refund back is bad because you've given Uncle Sam an interest-free loan? The argument here is that you get, say, $600 back from the government. You've supposedly made a money mistake by overpaying because Uncle Sam made an interest on this money when you could've.
The reality is, you would have spent that money anyway.
We know this because small tax refunds that are gradually added to your paycheck get spent. Big tax refunds get saved or used to pay off debt.
Technically, the math may tell you to not get a tax refund and owe the government money come tax season, but who actually wants to pay a huge lump of sum? What would you do if you didn't have it?
In truth, owing $600 to the government would affect your life far more than getting $600 back, meaning it's better to get money back than to owe it. Don't feel bad about getting a tax return and using that money to pay down debt or simply save it. It's great.
And even if we assume for a moment that the government IS making interest off of that $600, how much would that be?
At a high-interest account, that is $1.50 per month in interest - ohhh, cha-ching, you might be able to buy a Subway sandwich after four months or so.
That payoff is worse than cutting back on a single latte.
TAX MYTH #2: It's better to NOT make more money to avoid paying more in taxes
I came upon a story via Reddit of someone who turned down a raise because he believed he would actually make less because he'd move into the next tax bracket and pay more in taxes.
Excuse me while I go scream into a pillow. That is utter lunacy.
Please, for the love of god, spend three minutes learning about "marginal tax brackets." (Here's a good primer.) Basically, if you start earning more and move up tax brackets, the "marginal" amount - or the money in the higher tax bracket - is taxed at a higher rate. NOT THE ENTIRE AMOUNT YOU EARN.
Anyone who intentionally turns down money or raises to avoid paying taxes is an imbecile. Yes, I said it. I posted about this on Instagram and watched all the trolls roll in refusing to be proven wrong and even calling me a socialist. Me, a guy who runs a business selling products created by talented employees who I pay. That's the essence of capitalism!
I just don't understand people.
TAX MYTH #3: A ton of tax money goes to foreign aid
People get really angry how their tax money is spent, but actually have NO real clue where that money goes. For example, some people think 10% of our tax money gets spent on foreign aid. In reality, it's only 1%! Here's a quick breakdown of where our tax money actually goes:
- Medicare, Medicaid, and other similar subsidies: 26%
- Social Security: 24%
- Defense and security: 15%
- Safety net program: 9%
- Interest on debt: 7%
And so on. The point is, people just love to say, "I don't mind paying taxes as long as it doesn't go towards [insert some random thing]."
Thank you, but that's not how taxes work in a democracy. You don't get to pick and choose where each dollar goes.
TAX MYTH #4: The rich never pay any taxes thanks to loopholes
There's a common perception that the rich take advantage of numerous loopholes to minimize or evade taxes. I know a lot about these loopholes.
There are a few legit ones - like tax efficiency in your investment accounts, maxing out your tax-advantaged accounts, and a few more - but not nearly as many as you think. In general, those loopholes are few and far between and largely available to the super-rich who earn millions via investment income (not a normal or even the high salaries of lawyers and doctors).
But there ARE certain loopholes for the super-rich that you probably haven't heard about.
TAX MYTH #5: Your politics don't cloud your rational judgement on taxes
We'd like to think our beliefs about taxes are rational and fair.
Your personal psychology (not to mention your sources of information) plays a huge role in your beliefs about taxes. As Psychology Today noted on a paper about the psychology of taxation, "People have a number of general beliefs about what kinds of exchanges should be taxable, and they want tax law to fit with those beliefs. When tax law conflicts with those beliefs, then people think the tax is unfair."
Next time you hear someone ranting and raving about taxes, ask them this: "It sounds like you don't like taxes. What do you think your taxes get you?"
This does two things:
- It shifts the conversation away from the scarcity-based pandemic of people who see taxes as taking something away from them to seeing them as the price you pay as part of a democracy.
- When you realize how much this person now hates you, at least I won't be the only one feeling the hate of 1,000 suns. Misery loves company!
My message to you here is simple: The best thing you can do for your taxes is to stop arguing on Twitter and focus on maxing out your tax-advantaged accounts, such as your 401(k) and employer match, Roth IRA, and even HSA accounts (you can learn all about this in the updated version of my best-selling book on personal finance, "I Will Teach You To Be Rich"). All this needless worrying stemming from WRONG information takes away what would truly be in your best interest.
Oh, and please, PLEASE do not refuse to earn more money because you want to "avoid" paying more in taxes.
Ramit Sethi is the author of the New York Times bestseller "I Will Teach You to Be Rich" and writes for more than 1 million readers on his website, I Will Teach You to Be Rich. He's been featured on The Wall Street Journal, CNBC, The New York Times, and more. Sign up here to see why 400,000+ readers LOVE his personal finance advice.
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