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Related topics: taxes, tax laws, IRS, deductions, 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. If you find you need more help, consult a tax professional.

Myth 1: Students are exempt

Lots of people believe there's an exemption for students that excludes them from income 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 Lifetime Learning Credit and the new American Opportunity Credit, which has replaced the Hope Credit for 2009 and 2010. 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 the previous year and don't expect to have any the current year, that's OK. But let's say a student earned more than $5,700 in 2010. 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.

Jeff Schnepper

Jeff Schnepper

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 in 2010. This income test doesn't apply to whether the child qualifies as your dependent for, say, medical expenses, 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.

Myth 3: I'm over age 55, so I can sell my house tax-free

Wrong again, graybeard! You're thinking old law.

It used to be that if you were older than 55, you could exclude as much as $125,000 in gains from taxes, but only once. Now the rules are even better.

Under current law, age no longer matters. If the property sold was your principal residence for at least two out of the last five years, you can exclude from tax as much as $250,000 in gain (and $500,000 in gain on a joint return).

Your age is irrelevant, and you can take the gain exclusion every two years if you qualify. By the same token, if your property appreciates by $250,000 to $500,000 every two years, give me a call. I could use your help in finding a new house.

Myth 4: I had to buy my first house to be a first-time homebuyer

Surprise! You don't have to be a first-time homeowner to get the first-time homebuyer credit of up to $8,000. You qualify if neither you nor your spouse had an interest in a principal residence for the three years prior to closing on the new house (which had to happen before September 2010).

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Alternatively, you may qualify for a credit up to $6,500 if you owned and used a home as a principal residence for at least five consecutive years out of the eight year period ending on the date of the purchase of the new home.

Both qualify as "first-time homebuyers."