Most taxpayers will admit that they have a hard time understanding basic tax rules. Who can blame them? It’s complicated. Still, only 32 percent hired a tax professional while 35 percent used some type of commercial tax software. The remainder depended on family members, significant others, free IRS software (available to certain income groups) or companies like H & R Block. Kevin Thompson, CPA says “this is like showing up at a gunfight with a water pistol. Taxpayers are increasingly outmatched by an underfunded IRS and their inability to hire and pay for competent professional services.”
8 questions were given to a group of average Americans regarding IRS rules. Out of the group, only 25% of the questions about basic tax rules were answered correctly. Half of them had no clue what tax bracket they were in and 58% thought a tax extension meant they could delay paying their income tax by the due date. Thompson says “I guess they know now that they can extend filing but not payment. I say I “GUESS” because we discover every year yet another client unaware of the onerous penalty system imposed by the IRS and their voracious appetite for those penalties.”
71% were correct in knowing they could adjust their federal withholdings at any time during the year and 61 % knew mileage driven for volunteer work was deductible. Thompson says “not every employer will allow you to change your withholding at any time. Many give you a window of time at the beginning of the year.”
Below are other questions they were asked about basic tax rules
Are gambling losses deductible on federal income tax? Over half were wrong. 34 % correctly stated that they could take deductions if the amount wasn’t more than they won.
When is the deadline to make a tax-deductible contribution to a traditional IRA for 2016 taxes? 41 % knew the deadline was April 18th but the rest had no idea. Thompson says “remember its 4/18 in 2017 but that date will change annually. For instance, in 2018, I believe the date will be 4/17.”
True or False: A paid federal income tax return preparer doesn’t need a valid Preparer Tax Identification Number. Surprisingly, over half weren’t sure. Thompson says, “how can taxpayers know this when the IRS is unsure of proceeding with this process. There are tax preparation sites on virtually every corner strip mall in this country. How can they know the difference?”
True or False: Contributions to a 529 college savings plan are deductible on federal income taxes. 89% thought the answer was true. Thompson says “the contribution is not deductible but the growth in the account is tax-free if used for education. If not, they act just like an IRA and the income will be taxable when withdrawn.”
Which of the following best describes a W-4? Only 43% knew it was a form to notify employers how much income tax to withhold from a paycheck. 3 % thought it was a special designation to allow them to prepare taxes for others.
Are tax rules confusing to you? Make sure to contact a qualified tax preparer. Kevin E. Thompson CPA says “fees paid to a competent professional for tax preparation and planning advice is money well-spent and, in most cases tax deductible. Most taxpayers shy away from this as it is daunting and can be expensive. We created the Action Tax (www.action-tax.com) division to provide lower cost services for American taxpayers.”