5 tax myths that can cost you money

By Jeff Schnepper

Santa Claus. The tooth fairy. Babe Ruth pointing to where he would hit a home run in the 1932 World Series. Someone who knocks on your door, smiles and announces, "I'm from the government, and I'm here to help you."

Our culture is full of myths. And our tax system is full of myths, half-truths and untruths that can cost you big bucks if you don't understand the rules.

So let's have a look at some of the bigger myths about taxes. If I've done my job properly, I'll show you how they can trap you and how you can save money by separating myth from reality. And if you find you need more help, check this site for more information, or consult a tax professional.

Myth 1: Students are exempt

Lots of people believe there's an exemption for students that excludes them from tax. Wrong, scholarship breath!

There's no special tax status afforded to students. They are subject to tax on all their income, regardless of how many credits they're taking or whether or not they're fully matriculated.

Students do get special tax credits, the Hope Credit (replaced for 2009 and 2010 by the new American Opportunity Credit) and the Lifetime Learning Credit. In addition, distributions from a Section 529 Plan are tax-free. But their income is subject to tax, just like everyone else's.

Many students who work over the summer check the box "exempt" on their W-4's. If they had no taxable income last year and don't expect to have any this year, that's OK. But let's say a student earned more than $5,450 in 2008 or $5,700 in 2009. And let's say she is claimed as a dependent on her parents' return. She will owe tax and penalties if she owes more than $1,000 or actually fails to file. Don't get caught in this trap.

Myth 2: My child is working, so I can't claim him as my dependent

Again, pure myth. As long as you provide more than half that child's support (and meet other qualifications such as citizenship and relationship), the child qualifies as your dependent, and you can deduct, for example, all the medical costs you paid for that child.

Remember, support is what's spent, not what's earned. So, let's say your child makes millions as a teenage fashion model. If she banks all the cash and you actually shell out the dough to support her profession, you've provided 100% of that child's support.

You can also qualify for a personal exemption for that child if the child doesn't earn more than the value of that exemption -- $3,650 for 2009. This income test doesn't apply to whether the child qualifies as your dependent, nor does it apply if the child is under age 19 or is a full-time student under age 24.

A child qualifies as a full-time student if, during each of any five months of the calendar year, he or she (a) is in full-time attendance at an educational institution or (b) is taking a full-time course of instructional or farm training.

Continued: Selling homes tax-free

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