EDITORIAL: Tax quiz makes case for simplification
February 28, 2015 - 12:01 am
Does filing your federal tax return make you feel stupid? You’re not alone.
Do you know when you are allowed to adjust your withholdings and exemptions on your W-4 with your employer? Do you know what a flexible spending account is? Are gambling losses tax-deductible?
These and other questions are part of a quiz on federal tax filing put together by the personal finance website NerdWallet. As you can see, some of the questions are fairly absurd, while others are pretty simple.
The site gave the survey — which covered personal finance issues including retirement, college savings and health care — to more than 1,000 adults. And the average respondent failed miserably, answering just five out of 10 questions correctly. The subpar results are yet another reminder that the federal tax code is far too complicated.
“The U.S. tax code confuses the average American, and that confusion can be costly,” says Shiyan Koh, general manager of NerdWallet’s “Ask an Advisor” page, where consumers can get answers to their tax-related questions from financial experts. “It’s clear that consumers need to search out the best expert advice to steer through thorny tax questions that hit their pocketbook.”
As Mr. Koh says, knowledge equals money when it comes to filing your taxes, and many survey respondents are potentially missing out on tax savings because they don’t know which savings they’re entitled to. For example, more than 40 percent of respondents weren’t aware that flexible spending accounts reduce their taxable income by saving for planned medical expenses or child care costs. Almost 60 percent of those who took the survey were confused about the Roth 401(k), a post-tax retirement savings account, which provides tax-free growth and earnings.
Respondents struggled with questions about less-common deductions, too. Less than half knew that they could write off the loss if a friend or family member failed to pay back a loan. More than 40 percent were unaware that they could deduct expenses related to things like gambling or fostering a pet. And only 36 percent knew that, whether they owe money to the government or are due a refund, the absolute worst thing they can do is not file at all. (Taxpayers who file more than three years late risk losing any refunds they were due for those years.)
This is ridiculous. Congress needs make filing federal income taxes simple enough for everyone to complete on a single sheet of paper. Lawmakers should pass major tax simplification that reduces rates and deductions — and expands our collective peace of mind.