Smart Money Moves: Tax Misconceptions


As we end another tax season, it’s crucial to address prevalent misconceptions surrounding taxes. Despite their annual familiarity, taxes remain a topic shrouded in confusion and misunderstanding. In this guide, we aim to shed light on some of the most pervasive myths and clarify the nuances of tax deductions, credits, penalties, refunds, and more. By debunking these misconceptions, we hope to empower readers with a clearer understanding of their tax obligations and opportunities for financial optimization.    

Tax Deductions  

There’s a common misconception that tax deductions automatically translate into a dollar-for-dollar reduction in taxes owed. This is not the case. While they do lower taxable income and can result in less taxes owed, tax savings thanks to deductions are based on your tax rate, unlike tax credits which offer a direct offset of taxes.   

Deduction Example:  

Last year, we aided a client in donating $20,000 worth of equipment to charity. Despite the substantial donation, the actual tax benefit depends on various factors, most significantly the client’s tax bracket. If the client’s income were to put them into the highest federal income tax bracket of 37%, the donation would lead to a total tax reduction of $7,400, not $20,000 ($20,000*0.37). A deductible expense simply means that you get a discount on the expense and are not required to pay income tax on the purchase.  

Tax Credits  

When it comes to tax credits, it is often understood that they’re interchangeable with tax deductions, which is not true. Tax credits directly reduce the amount of tax owed, dollar for dollar. Once your taxes have been calculated, any tax credits will subtract the total amount of taxes owed.  

Tax Credit Example:   

Take, for instance, the Child Tax Credit, which offers a $2,000 credit for a child 17 and under who is claimed as a dependent. If a single parent with a young child has a federal tax liability of $5,000, they could likely claim this credit thus reducing their tax liability to $3,000.  

Additionally, it’s important to note that tax credits aren’t necessarily free money. While they can be an added bonus, most credits only provide a refund if you owed taxes to begin with, meaning you earned enough in taxable income during the year to qualify for the credit, but not too much to no longer qualify. Understanding these distinctions is key to maximizing your tax benefits and avoiding misconceptions.  


Tax Deductions vs. Tax Credits  

Consider the comparison of tax deductions and tax credits in a shopping context. A tax deduction resembles a favorable promo code, providing a certain percentage off your total purchase—equivalent to your marginal tax rate (or the highest rate your income is taxed). Conversely, a tax credit operates akin to a gift card, offering a specific dollar amount reduction from your overall purchase. While not precisely free money, it’s a close second.    

Tax Penalties  

Another misconception exists around tax penalties, which are often believed to apply solely to those intentionally evading taxes. Tax penalties can stem from various factors, including underpayment, late filing, or inaccuracies on your tax return, regardless of intent.   

Tax Penalty Example:  

I received a letter a couple years back detailing an underpayment penalty on my tax return. The letter outlined that I owed more than what was listed on my tax return. Since it had been many months since filing my return, I was also being charged additional fees on the “late” amount because the additional taxes were due by April 15 (as federal taxes always are). Despite the stressful process, I enlisted the help of a CPA to appeal the penalty and avoided owing the additional taxes and penalties. If you end up owing more tax than originally paid, you will owe penalties on top of the underpayment amount for however long it takes for the IRS to notify you of the underpayment amount.    

Tax Refunds

Regarding tax refunds, many believe that refunds are free money from the government. It’s important to understand that a tax refund is not a gift from Uncle Sam, but rather signifies the return of your overpaid taxes throughout the year, though that doesn’t stop them from feeling oh so nice to receive.  

Tax Refund Example:  

If you owe $10,000 in federal taxes for 2023 and $9,000 was withheld from your paycheck for federal taxes throughout the year, you will owe $1,000 at tax time. Conversely, if $11,000 was withheld, you would receive a $1,000 refund. I spoke with a CPA friend recently who said that the only thing clients ever want is a refund, joking that he would be seen as a magician if he increased his clients’ paycheck withholdings for them to get massive refunds upon filing their tax returns. Many personal finance gurus have strong opinions for how to optimize withholdings. Find what works for you, just withhold enough that you don’t incur penalties.  

Business Write-Offs/Deductions

There’s a common misbelief that all business expenses are automatically deductible. Not all expenses qualify for deductions. Business expenses must meet the criteria of being regular, ordinary, and necessary for the operation of your business to be deductible, with certain limitations and rules in place.  

Business Deduction Example:  

An individual takes a business trip to a tropical destination, intending to deduct all associated expenses, such as hotel stays and meals. The IRS may deny such deductions if the trip is deemed primarily for personal enjoyment rather than business purposes. Make sure your business expenses qualify to be deducted prior to spending money you hope will be tax deductible.  


It is often believed that gifting will result in taxation for gifts exceeding the annual gift exclusion limit. While true in a way, it’s essential to understand that the tax-free exclusion amount—$17,000 for 2023 and $18,000 for 2024—applies on a per person basis. Also, individuals can give up to $13.61 million (2024 amount) in tax-free gifts in their lifetime (known as the lifetime gift exclusion), so this exclusion of $18,000 (for 2024) is the amount that can be gifted without counting against the lifetime exclusion. This can get very complex as there are varying gifting strategies to consider, and attempting to implement any of them on your own can be extremely difficult.  

Gifting Example:  

Consider an older couple aiming to provide generous gifts to their two married children without incurring taxes. In this situation, each spouse could gift $18,000 to both children and their spouses, totaling $72,000 in tax-free gifts per spouse or an impressive $144,000 collectively as a couple. All of this could be done without counting against the lifetime amount in tax-free gifts that can be given.   

529 to Roth Conversions  

A common misconception exists regarding education savings and deductions, particularly regarding the conversion of unused 529 balances to a Roth IRA (a new strategy from the Secure Act 2.0). While there is some truth to this notion, it’s crucial to understand the limitations involved.   

529 to Roth Example:  

Consider a scenario where you have $50,000 sitting in a 529 account but decide not to pursue further education. In such a case, you may contemplate rolling the funds into a Roth IRA, which could be an option. This maneuver comes with restrictions. For instance, the 529 account must have been open for at least 15 years, and the rollover cannot exceed the current year’s Roth contribution limits—$7,000 for 2024. There’s also a lifetime maximum of $35,000 per beneficiary for these rollovers. While there are more intricacies to be aware of, the process is not as straightforward as commonly believed.  

Tax Preparer Liability  

There’s a common belief that the liability for errors or inaccuracies associated with tax returns is solely on the tax preparer. It’s imperative to recognize that the individual, the taxpayer, is responsible for the accuracy of their tax returns, regardless of professional assistance.   

Tax Preparer Liability Example:  

If someone hires a CPA to file their tax return but provides inaccurate income information or doesn’t send all required information/supporting documents, they remain accountable for any discrepancies. In the event of an IRS audit uncovering errors, the individual is liable for rectifying the mistakes and covering any resulting back taxes and penalties.  


As we end tax season for tax year 2023, we extend our gratitude to the remarkable CPAs we collaborate with. As we at Albion Financial Group are not accountants and do not give tax advice, their expertise ensures accurate tax filing and reporting, guiding us away from the pitfalls of common misconceptions. To those dedicated CPAs tirelessly navigating the complexities of the tax code, we salute your unwavering commitment. Here’s to the invaluable knowledge they impart and the smooth tax planning ahead!   

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.