Apr 18, 2017
Take this 10-question tax quiz and see how you do
American adults appear to be confused — very confused — by the U.S. tax code.
More than half of taxpayers don’t understand many basic personal finance questions about federal income tax returns as they relate to retirement, college savings and health care, a result not much changed from previous years, based on a recent survey of more than 2,300 adults given by personal finance site NerdWallet. That is a fail by academic standards.
Indeed, more people are also delaying filing their taxes this year. Earlier this month, tax software service TurboTax issued a profit warning and said that the tax season is “forming more slowly than usual.” It cited Internal Revenue Service data which said total tax return volume through Jan. 27 was down 33% from a year ago.
One theory: They simply don’t know what they’re doing. Some 57% of taxpayers don’t know what a W-4 is, the Nerdwallet survey found, and 59% don’t know that April 18, 2017 is the deadline for making a tax-deductible contribution to a traditional individual retirement account for the 2016 tax year. What’s more, 58% of taxpayers incorrectly believe that getting a tax extension means they can delay the due date of their income tax payment.
The majority knew about tax withholdings from their paycheck, but they understandably struggled with more complex questions about Roth IRA and individual retirement accounts, says Alex McAdams, product manager at NerdWallet. People shouldn’t be too quick to celebrate an income tax refund, which averaged $2,860 in 2016. “You are essentially giving the government a free loan as opposed to having control of that money all year long and putting it in a savings account or maybe even investing it,” he says.
“Some of the questions were easy, but others I wouldn’t expect people to know,” says Ian Gillespie, founder of IGG Software and creator of iBank, an online personal finance manager. “American tax law is extremely complicated and a lot of these feel like they could be trick questions.”
Among the list of questions listed (below), he said No. 2 (“Can married couples file taxes separately?”) easy, but wouldn’t expect a lot of people to know the answer to No. 7 (“If you lend money to a friend and she doesn’t pay you back, can you write it off?”).
Here are 10 questions (with the answers on the following page):
1. Is the money you put in a Roth IRA pretax or post-tax?
A) Pretax.
B) Post-tax.
C) None of the above.
42% got the right answer.
2. Can married couples file taxes separately?
A) Yes.
B) No.
90% got the right answer.
3. When can you adjust your withholdings and exemptions on your W-4 with your employer?
A) Any time of the year.
B) Any time before Jan. 1 of each year.
C) After you receive your W-2 from the previous year’s earnings.
D) By the end-of-year tax deadline.
67% got the right answer.
4. A 529 plan is:
A) A way to make tax-deductible contributions for college savings.
B) A college investment plan that earns tax-free income as it grows.
C) A plan that allows qualified users to defer their tax payments.
42% got the right answer.
5. What is a flexible spending account?
A) A tax-exempt savings account exclusively for health benefits.
B) A tax-exempt savings account that allows you to make home improvements.
C) A tax-exempt account for medical purposes or child care.
47% got the right answer.
6. If you foster a pet from a nonprofit charitable organization, can you claim a tax deduction?
A) Yes, but you can only write off certain items like food, shelter and medical expenses.
B) Yes, you can write off all expenses.
C) No, you can’t write this off.
45% got the right answer.
7. If you lend money to a friend and she doesn’t pay you back, can you write it off?
A) Yes, you can write off the entire loan.
B) Under certain circumstances, it can be deducted under capital loss rules.
C) No, you can’t write it off.
42% got the right answer.
8. Which of the following is tax-deductible?
A) Gambling losses.
B) Sex-reassignment surgery.
C) Babysitting (if you’re a parent doing charity work).
D) All of the above.
E) None of the above.
39% got the right answer.
9. Which of these is the worst mistake?
A) If you owe, not filing your taxes by the deadline (April 18 this year).
B) Filing but not paying your taxes by the deadline.
C) You are owed a refund, but you file late.
D) You are owed a refund, but you don’t file at all.
36% got the right answer.
10. If your exemptions and withholdings are correct, your tax refund should be:
A) $2,500, or more.
B) $1,500 to $2,500.
C) $500 to $1,500.
D) As close to $0 as possible.
56% got the right answer.
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