I have been a tax attorney since the 1990s, and I can tell you that some of the most expensive tax mistakes begin with something people “know” that simply is not true.

They think an LLC automatically saves taxes. It does not. 

They think a bonus is taxed at some outrageous rate. It is not. 

They think filing an extension means they do not have to pay yet. Wrong again.

These tax myths affect employees, retirees, investors, landlords, and business owners. Below are the 10 most common myths I hear, along with the reality behind each.

Key Takeaways

• An LLC does not automatically reduce your taxes, which is why effective tax planning for business owners goes beyond simply forming an entity.
• A bonus may be subject to different withholdings, but it is not automatically taxed at a higher rate. 
• Tax deductions and tax credits do not provide the same savings.
• Moving into a higher tax bracket does not subject all your income to the higher rate–an important distinction in tax planning for high-income earners.
• Reinvested dividends remain taxable in a taxable brokerage account.
• A large refund usually means you overpaid during the year.
• The IRS may tax part of your Social Security benefits.
• Tax extensions provide more time to file, not more time to pay.
• Wages, dividends, and capital gains may receive different tax treatment, while rental income follows its own rules—making tax planning for landlords essential.
• The home sale exclusion is larger and more flexible than many people realize.

Want more tips on tax planning for investors and business owners? Watch the video and subscribe to my channel.

Myth #1: An LLC Automatically Saves You Money on Taxes

An LLC is a legal structure—not a tax strategy. The IRS generally treats a single-member LLC as a disregarded entity, so its income passes to the owner’s personal return.

An eligible LLC can choose to be a C-Corporation or an S-Corporation, but that requires a separate tax election and careful planning. 

When forming an entity, business owners should consider which tax treatment could make their business expenses and employment taxes more efficient—both now and as the business grows and its tax situation changes.

Myth #2: Your Bonus Is Taxed at a Higher Rate Than Your Salary

A bonus may be subject to different withholdings, but it is not automatically taxed at a higher rate.

Your employer may calculate bonus tax withholding differently from regular wages. However, when you file your return, the bonus becomes part of your ordinary income and moves through the standard tax brackets.

Do not confuse the amount withheld from your paycheck with your final tax liability.

Myth #3: Tax Deductions and Tax Credits Are the Same

Tax deductions reduce your taxable income, while tax credits generally reduce your tax bill dollar for dollar.

If you fall within the 24% tax bracket, a $2,000 standard deduction may save you approximately $480 in federal income tax. A $2,000 credit could reduce your tax bill by the full $2,000.

This distinction also matters when evaluating tax deductions for rental property. Spending $2,000 does not mean the IRS reimburses you $2,000. Before spending money on a write-off, you should work with your tax advisor to determine what tax planning strategies are best.

Myth #4: Your Tax Bracket Applies to All Your Income

Moving into a higher tax bracket does not subject all your income to the higher rate.

The United States tax code uses a progressive tax system, which applies different rates to different portions of your income. Only the income above a particular threshold generally enters the next marginal bracket.

Understanding how tax brackets work is especially important in tax planning for high-income earners. Fear of a higher bracket should not stop you from accepting a raise, earning additional income, or considering a Roth conversion. For help with tax brackets, download your 2026 cheat sheet here.

Myth #5: Reinvested Dividends Are Not Taxable

Dividends paid by stocks or mutual funds in a taxable brokerage account generally remain taxable even when you automatically reinvest them.

Each reinvestment purchases additional shares at a new price, so you must track the cost basis of those shares to calculate your capital gains and future taxes accurately when you sell. However, dividends reinvested within a tax-deferred account, such as a traditional IRA, generally are not taxed until you withdraw the money.

Myth #6: A Large Tax Refund Means You Won

A large refund usually means you paid more federal, state, and local taxes than you owed during the year. The government held your money and returned the excess after you filed–essentially, you gave them a free loan.

Some people intentionally overwithhold to force themselves to save. However, over-withholding can limit the money available for expenses, debt repayment, or investments.

Review your withholdings regularly to make sure they align with your anticipated tax liability.

Myth #7: Social Security Benefits Are Tax-Free

The IRS may tax part of your Social Security benefits based on your combined income.

Once your income exceeds certain thresholds, the IRS may include up to 50% or 85% of your benefits in taxable income. This does not mean you pay an 85% Social Security tax. It means the IRS may use up to 85% of your benefits when calculating taxable income.

IRA withdrawals, pensions, dividends, and capital gains can all affect this calculation.

Myth #8: A Tax Extension Gives You More Time to Pay

Tax extensions provide more time to file—not more time to pay.

An individual federal extension generally moves the filing deadline from April to October, but you must still estimate and pay what you owe by the original deadline. Otherwise, penalties and interest may accrue.

An extension gives you more time to prepare an accurate return. It does not postpone your tax bill.

Myth #9: All Income Is Taxed the Same

The tax code treats wages, dividends, rental income, and capital gains differently.

• Wages may be subject to income and employment taxes. 
• Long-term capital gains and qualified dividends may be subject to preferential rates.
• Rental income is subject to separate IRS rules for rental property, including rules for expenses, depreciation, and passive losses.

The amount you earn matters, but so does how you earn it. Different types of income receive different tax treatment, which can directly affect how much you keep. 

Myth #10: The Home Sale Exclusion Is Small, Rare, or Available Only Once

The Section 121 Home Sale Exclusion may allow qualifying homeowners to exclude up to $250,000 of the gain, or up to $500,000 for married couples filing jointly.

Generally, you must own and use the property as your principal residence for at least two of the five years before the sale. The exclusion is not necessarily limited to one use during your lifetime. If you continue to meet the requirements, you may qualify again after the applicable two-year period.

Understanding this exclusion before selling could save you thousands in taxes.

Frequently Asked Questions About Taxes

How Did the Tax Cuts and Jobs Act Affect Tax Planning?

The Tax Cuts and Jobs Act changed tax brackets, deductions, business tax rules, and other provisions that affect individuals and business owners. Because Congress has since extended or modified some provisions, taxpayers should review their strategies regularly rather than rely on rules from a previous tax year.

Is It Better to Owe the IRS or Get a Tax Refund?

Ideally, you should come as close as possible to paying the correct amount throughout the year. A large refund generally means you overpaid, while owing the IRS too much could result in penalties and interest. The goal is not necessarily owing the IRS or getting a refund—it is managing your withholdings and estimated payments, so you keep more cash during the year without facing an unexpected tax bill.

How Are Sole Proprietorships and Limited Partnerships Taxed?

A sole proprietorship does not file a separate federal income tax return. The owner reports the business’s income and expenses on their personal tax return and generally pays income tax and self-employment tax on the net profit.

A limited partnership typically files an informational tax return but does not pay federal income tax at the partnership level. Instead, profits and losses pass through to the partners, who report their shares on their individual tax returns. General partners may owe self-employment tax on their share of business income, while limited partners generally pay self-employment tax only on guaranteed payments for services.

In both cases, the owners usually pay taxes on business income as part of their annual personal tax liability, even if they leave some of the profits in the business.

How Are Inherited Assets Taxed?

Most beneficiaries do not pay federal income tax when they inherit cash or property. However, federal or state estate taxes may apply before the estate distributes the assets, and some states impose an inheritance tax on beneficiaries.

Taxes may also arise later. Beneficiaries could owe income tax on inherited retirement account withdrawals or capital gains tax when selling inherited property. Proper estate planning can help families anticipate these tax consequences and transfer assets more efficiently.

The Bigger Lesson Behind These Tax Myths

When you believe a tax myth, you do more than misunderstand the system. You make decisions with real, costly consequences. You may choose the wrong tax election, misunderstand your withholding, chase tax savings that provide little value, or overlook tax benefits.

Good tax planning begins before you file your return. It means understanding the rules early enough to make better decisions.

At Anderson Advisors, we can help investors and business owners evaluate their tax-saving opportunities and create a multi-year roadmap.

When you schedule a complimentary Strategy Session, you’ll work with a Certified Tax Specialist who can help you evaluate what you’re currently paying and discover strategies that fit your situation.