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Many Tax Myths Still Have a Hold on Taxpayers, CCH CompleteTax Survey Finds

Holding on to false beliefs can mean paying more, and doing more work at tax time

(RIVERWOODS, ILL., February 21, 2008) – Each year as tax season approaches, tax myths prevail on the American psyche, leaving some taxpayers dreaming of big savings they’ll never get, fearful of problems that don’t exist or open to penalties and fines if they complete their returns based on inaccurate information. This year, CCH CompleteTax® undertook a nationwide survey to see just how deep some of these myths run, and the findings indicate many tax myths are well ingrained.

“When you are dealing with something as complicated as income tax law, it’s not uncommon for misconceptions to arise. People are rightfully confused, they’re trying to simplify matters and it ends up leading to all types of potential errors. That’s why it’s a good idea to rely on tax software or a professional tax preparer to make sure your income tax return is done correctly,” said David Bergstein, CPA, a tax analyst for CCH CompleteTax. CCH CompleteTax (www.CompleteTax.com) is an online tax preparation and e-filing solution for the do-it-yourself taxpayer.

The CCH CompleteTax survey, conducted by Harris Interactive®, asked more than 2,000 adults to answer questions related to six common tax myths, and CCH then set out to debunk the myths:

Myth #1: A home seller can take a capital loss write off for a home that sells at a loss.

Only 8 percent of respondents to the CCH CompleteTax survey answered correctly that a homeowner cannot write off a loss if they sell their home for less than they’d paid for it. Three in 10 respondents believed incorrectly that a write off could be taken for a loss and most – 62 percent – don’t know which answer to believe.

Given the slumping housing market, many home sellers may wish they could take a capital loss on their home, but it’s not allowed.

“Under tax law, your home is considered personal property, and you can’t take a deduction for personal property that you sell at a loss, whether it’s your car, a computer, your house or any other personal property,” said Bergstein. “This is particularly hard for some taxpayers to swallow because if they sell their home for a gain, they may have to pay capital gains taxes.”

Myth #2: Sales tax and state income tax are not deductible.

How much myth and how much fact this is depends on which year you’re speaking about…and could change, again, before 2008 ends. The tax code related to deducting sales tax or state income tax has caused a lot of confusion through the years. It used to be that individuals could deduct sales tax if they itemized. Then that option was removed. Starting in 2004 and renewed for 2006 and 2007, the option became that they could choose to deduct either their sales taxes or state income tax, but not both. For 2008, the law reverts to just being able to deduct state and local income tax, not sales tax, unless legislators extend the provision sometime this year.

As for what people believe, just 9 percent of individuals answered that either sales tax or state income tax, but not both, can be deducted from their federal tax return, which is the correct answer when filling out 2007 tax returns. Fifteen percent answered state income tax only can be deducted, which – at least for now – is the correct answer for 2008. But nearly one-third, 30 percent, responded incorrectly, regardless of tax year, believing you can deduct both sales tax and state income tax, neither tax or sales tax only. In addition to the large number of individuals that answered incorrectly, 45 percent don’t know which – sales tax and/or state income tax – can be deducted on their federal return.

“When tax code changes go back and forth like this, it makes it very hard for taxpayers not using tax software or a professional tax preparer to keep the rules straight year to year, and that could be costly in missed deductions,” said Bergstein.

Myth #3: The recipient has to pay taxes on gifts or inheritance.

Only 11 percent answered correctly that individuals receiving a gift or inheritance generally do not have to pay income tax on the proceeds, according to the CCH CompleteTax survey. Nearly one-half, 47 percent, answered incorrectly that the recipient owes taxes and nearly as many, 42 percent, don’t know the correct answer.

“Usually, gifts or inheritance that you receive are exempt from your federal income tax, with the donor responsible for paying the federal gift tax or the decedent’s estate paying the federal estate tax,” said Bergstein, adding that it is possible, though very unlikely, that the IRS could try to get the recipient to pay the tax if the donor or the estate did not.

Myth #4: Filing an income tax return electronically will trigger an audit.

Fewer than one-half of individuals (43 percent) realize that this is a myth, while 52 percent don’t know whether it’s a myth or not and 5 percent still believe e-filing a tax return increases the likelihood of an audit compared to mailing in the tax return.

“The IRS has clearly tried to communicate that there is no greater chance of being audited if a taxpayer e-files,” said Bergstein. “The irony is that if you manually fill in a return, it’s more likely you will leave out information, which is a sure-fire way to catch the attention of the IRS.”

Myth #5: Older children who are working cannot be claimed as dependents.

When asked if a couple could claim their 18-year-old child who is working and going to school part-time as their dependent, 49 percent of respondents to the CCH CompleteTax survey answered correctly that they can claim the child so long as they provide more than one-half of the child’s financial support. However, 20 percent answered incorrectly and an additional one-third (31 percent) don’t know if the child could be claimed as a dependent.

“Just because your child is working or is 18 years old isn’t enough to disqualify them as your dependent. Even if your child is a budding entrepreneur earning a nice paycheck or comes into a sizable inheritance, so long as you are providing more than half the child’s support, you generally can claim them as your dependent,” said Bergstein.

Myth #6: People should not file a tax return if they do not owe anything.

Most individuals appear to be catching on to at least one myth, with more than three out of four adults (77 percent) surveyed recognizing that you should file a tax return, even if you don’t owe anything. Only 8 percent answered that you should not file a return and 15 percent did not know which an individual should do.

“It’s great news that people are recognizing that filing a tax return when you don’t owe any money can be a good idea. For example, you may be able to claim credits, like the earned income tax credit, or get a refund if you’ve paid more than you owed in taxes,” said Bergstein. “It’s even more important this year because filing a federal income tax is the first step in making sure you receive any tax rebate you may have coming.”

About the Survey Methodology

The CCH CompleteTax survey was conducted online within the United States by Harris Interactive from January 30-February 1, 2008, among 2,020 adults (age 18 and over). No estimates of theoretical sampling error can be calculated; a full methodology is available.

About CCH CompleteTax

CCH CompleteTax (www.CompleteTax.com), an online tax preparation and e-filing service for the do-it-yourself taxpayer, continues to set the standard when it comes to making online tax prep and e-filing easy, efficient and affordable. CCH CompleteTax offers comprehensive support to help taxpayers through each step of preparing and e-filing both federal and state income tax returns.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (www.CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem™, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com.

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