Debunking the myths.
Many taxpayers hold misconceptions about state and Federal income taxes that often cost them money. According to the Institute of Certified Financial Planners, Denver, Colo., here are a few of the common myths and the reality:
It's always better to invest in a tax-exempt investment than a taxable investment. Tax-exempt investments typically pay less interest than a comparable investment, in part because they aren't taxed. A taxable investment, in fact, may provide a better return after taxes are taken into account than a tax-exempt investment. The lower your tax bracket, the less valuable are tax-exempt investments.
A tax-exempt investment never is taxable. If you profit from selling a tax-exempt investment for more than you paid for it, the resulting capital gain is taxable. Also, income from a tax-exempt investment may be subject to state taxes or may increase the amount of Social Security benefits subject to tax.
States can tax the pensions of former residents. Congress eliminated the ability of states to tax the pensions of former residents funded by income they earned while living in that state. For some taxpayers, it may pay to move from a high-tax state to a lower-tax one.
Life insurance proceeds are taxable as income. Generally, they are not, though there are exceptions. However, proceeds can be subject to estate taxes if your estate is large enough.
Social Security benefits are not subject to tax. Single retirees with total income of $25,000 or more and married couples earning $32,000 or more will pay tax on at least half of their Social Security beneffts.
It is good to receive a large income-tax refund each year. Not unless you enjoy giving the government an interest-free loan or you don't save well on your own. By, reducing the amount you have withheld in taxes from your paycheck, you can save or invest that extra income and come out ahead.
You can't take a deduction for an individual retirement...
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