A new survey by NerdWallet and Harris Poll finds that Americans are failing at basic tax knowledge, and a significant number of taxpayers could be needlessly paying for tax software and services that they might be able to get for free.
The online survey of over 1,800 U.S. adults who filed taxes last year and plan to file this year found that, on average, respondents correctly answered only about two of eight questions on IRS rules for common deductions, retirement and education savings plans. The survey also found that more than a third of U.S. taxpayers with annual household incomes below $50,000 paid a tax professional or national tax preparation company to do their taxes last year — even though they may have actually been able to get that help for free.
Tax knowledge is low
The survey highlights a striking lack of basic understanding among Americans about the country’s federal income tax system. About half (46%) of taxpayers don’t know what tax bracket they’re in — or even what a "tax bracket" is, for example.
In addition, more than half (58%) of taxpayers incorrectly believe that getting a tax extension means they can delay the due date of their income tax payment, according to the survey. Nearly 3 in 5 taxpayers (57%) don’t know what a W-4 is or that April 18, 2017, is the deadline for making a tax-deductible contribution to a traditional individual retirement account (59%) for the 2016 tax year.
The lack of tax knowledge can lead to poor financial decisions and even costly mistakes, says NerdWallet columnist and certified financial planner Liz Weston.
“Knowing your bracket can help you determine the value of any deductions you take and whether a tax-advantaged investment is worthwhile,” she says. “When you pay a dollar in mortgage interest, for example, your bracket determines whether you can save 10 cents or 39.6 cents.”
» MORE: How much should you pay and get back? Check this federal tax calculator
Overlooked free options
More than a third (38%) of taxpayers making less than $50,000 annually hired an accountant (26%) or a national tax preparation company (12%) to do their taxes last year, according to the survey. But many of those taxpayers might actually be able to get tax software and help for free.
In addition, 33% used commercial software to do their taxes — and some may have filed with free tax software. Many of the big-name tax software companies allow customers to file simple federal returns, and sometimes even state returns, for nothing.
People who made less than $64,000 in 2016 may also qualify for free tax software from the IRS’s Free File program to file their federal and often state income taxes. In fact, the IRS estimated in 2016 that more than 70% of Americans — or about 100 million people — qualify to file their taxes for free.
Those options may go overlooked because, as the survey found, Americans who use tax software don’t shop around. Four in 10 respondents in the survey say they’ve used the same tax software provider for at least five years.
For Americans who want human interaction, programs such as Volunteer Income Tax Assistance offer free tax help to those who generally earn $54,000 or less, have disabilities or have limited English skills, Weston says. The Tax Counseling for the Elderly program also gives free tax help to anyone, though it specializes in issues relevant to older taxpayers.
“Most people do not need to spend hundreds of dollars to file their taxes when there are so many free and low-cost options,” Weston says.
Click here to see the full survey and the methodology.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: [email protected].