Most Americans Struggle with Basic Tax Concepts, Survey Finds

Source: AccountingWEB

March 7, 2017

By Terry Sheridan

Maybe this comes as little surprise to tax practitioners and CPAs, but a new survey by NerdWallet indicates that a significant number of Americans aren’t too sharp about basic tax rules. 
 
The good news is there’s certainly more new-client potential among the ranks of the clueless. Only 32 percent hired a tax professional to do their taxes last year, while 35 percent slugged it out themselves with commercial tax software, like TurboTax. The rest used family members or significant others, free IRS software for certain income groups, paper returns, or national tax-preparation companies (H&R Block, Jackson Hewitt, and Liberty Tax).

So, just how misinformed are Americans when it comes to taxes? Out of eight questions about IRS rules for common deductions, retirement, and education savings plans, taxpayers as a group got 25 percent correct.

About half (46 percent) didn’t know what tax bracket they fall into or what a tax bracket is, while 58 percent wrongly believed that a tax extension means they can delay paying their income tax by the due date. 

But, hey, 71 percent of them knew that they could adjust their federal withholdings at any time during the year, and 61 percent knew that mileage driven for volunteer work is deductible.

Here are the remaining findings from the NerdWallet survey:

Are gambling losses deductible on federal income taxes? More than half (66 percent) got that wrong, while 34 percent knew they could as long as the amount isn’t more than they won. 
 
What’s the deadline to make a tax-deductible contribution to a traditional IRA for 2016 taxes? Most (59 percent) got it wrong, while 41 percent knew that the deadline is April 18.

True or false: A paid federal income tax return preparer doesn’t need a valid Preparer Tax Identification Number. Almost half (44 percent) knew that the answer is false, while 56 percent either blew it or weren’t sure.

True or false: Contributions to a 529 college savings plan are deductible on federal income taxes. Only 11 percent knew the answer is false, while a whopping 89 percent either thought it was true or weren’t sure.

Which of the following best describes a W-4? More than half (57 percent) gave wrong answers, while 43 percent knew it was a form that notifies employers how much federal income tax to withhold from your paycheck. Some believed it’s a form that shows taxable capital gains for the year, or they weren’t sure. And here’s a goodie: 3 percent said it’s a professional designation that allows people to prepare taxes for others.

Harris Poll conducted the online survey for NerdWallet of more than 1,800 US adults who filed income taxes last year and intend to this year.