The economic consequences of the pandemic are putting people's tax knowledge to the test, and they are failing with flying colors.
A new poll shows that many adults in the US are in the dark about critical issues this tax season, such as: For example, how the Internal Revenue Service handles stimulus checks and whether remote workers can apply for a home office tax deduction.
Only 5% of more than 1,000 people surveyed by NORC at the University of Chicago correctly answered five true-or-false questions about the tax code. On average, people answered almost three (2.89) of the five questions correctly.
Let's face it: even in normal times, understanding the bulk of the rules and regulations is a tough job. In 2018, almost half of the respondents did not know which tax bracket they fall into. This reflects America's greater financial literacy challenges.
It gets even harder to take into account all the COVID-19 complications with taxes and get through the thicket of tax codes – and the stakes are now higher for people who don't know the pros and cons.
The 2020 CARES bill and a $ 900 billion bill in December resulted in significant changes to federal tax law. The same goes for the US $ 1.9 trillion rescue plan passed in March.
As a result, a lot depends on the 2020 tax return. This is your last chance to get any missed stimulus check funds from last year. However, people can also try to rely on portions of their return for 2019 to maximize their payout under certain loans.
Additionally, the IRS has moved the 2020 income tax filing deadline from April 15 to May 17. However, the April 15th payment deadline for Estimated Payments has been retained, which is an important point for gig staff.
It's no wonder a person's head is spinning.
The extent of wrong answers surprised Angela Fontes, lead researcher on the survey and vice president of NORC's Department of Economics, Justice and Society.
"This is a year when getting a refund will be of the essence for a lot of people," she said, adding, "If we have people who may not understand the tax code, at worst, the IRS will consider the mistake to be deliberate . " At best, refund checks could be delayed. "
By March 26, the IRS had received 85 million returns and issued 56.4 million refunds. The average refund check to date was $ 2,902.
Higher-income respondents tended to do better on the quiz, although Fontes said lower-income respondents could least afford the lack of knowledge of how to raise the final tax dollar. "It is these people who are probably most at risk of financial uncertainty who have even the slightest knowledge of tax issues."
Here are the questions. You can find the answers at the end of the article.
People don't have to pay taxes if they don't have an income. Right or wrong?
If someone worked from home instead of their usual place of work last year, they can claim their home office as a tax deduction. Right or wrong?
People don't have to pay taxes on what they got from their stimulus checks. Right or wrong?
People don't have to pay taxes on unemployment benefits. Right or wrong?
Income from gig economy jobs will continue to be taxed. Right or wrong?
For the first question the answer is not correct. The IRS will certainly tax earned income, but it says that types of unearned income are taxable. This includes child support, alimony, interest and dividends.
Very few people understood this correctly in the survey. 21% of people making less than $ 30,000 answered this correctly. Around 30% of people in each of the other three income brackets – $ 30,000 to $ 60,000, $ 60,000 to $ 100,000, and over $ 100,000 – answered correctly.
For the second question the answer is not correct. While the tax code provides a tax break for working from home, the deduction does not currently apply to people who are employees. This applies to individuals such as self-employed taxpayers and independent contractors who, according to the IRS, must prove that they use part of their home “exclusively and regularly as the main place of business for a trade or business”.
Correct answers ranged from approximately a quarter of those who earned less than $ 30,000 to 41% of those who made more than $ 100,000.
For the third question the answer is true. Stimulus checks, whether it is the first, second or third round, are not counted as taxable income. This is one of the many myths revolving around economic impact payments.
In the quiz, this is also the exception to the rule that participants with higher incomes are more tax-savvy than participants with lower incomes. 65% of people who earn more than $ 100,000 answered the question correctly. 76% of people making less than $ 30,000 answered correctly.
Wealthier respondents may have been less likely to receive the checks, Fontes said. Full checks were made to individuals earning up to $ 75,000 and married couples who collectively earned $ 150,000.
Lower-income participants may also know the intricacies of the stimulus check rule because "they're probably the people who count every penny of those stimulus checks," said Fontes.
For the fourth question the answer is not correct. Taxpayers have to pay tax on the unemployment benefits they will receive in a year.
The US bailout has changed federal regulations on this, in part due to concerns of some lawmakers that many people would become blinded by this tax rule after a year of massive job losses.
The American Rescue Plan waives federal income tax on the first $ 10,200 in unemployment benefits an individual receives and on the first $ 20,400 in benefits a couple receives while the household earns less than $ 150,000. If a taxpayer filed their tax return before the exclusion became law, the IRS will automatically readjust the tax return. State income tax rules may differ.
NORC noted that the survey was conducted before the $ 10,200 exclusion became law.
The answer to the fifth question is not correct. Yes, taxpayers have to pay taxes on their “sideline” and that was the question most people got right. Correct response rates ranged from 64% of those earning less than $ 30,000 to 91% of those earning more than $ 100,000.
Income and social security taxes are already deducted from an employer's paycheck. A person who is their own boss still has to pay tax, but they have to do it themselves. Gig employees can make these payments in four installments during the tax year.
Although May 17 is the deadline for filing federal income taxes for 2020 and paying taxes owed, April 15 marks the first of four deadlines for estimated payments in the 2021 tax year.
"Talk about confusion, not just for tax professionals but for individual taxpayers," said Barbara Weltman, founder of Big Ideas for Small Business and author of "J.K. Lasser's Guide to Self Employment," MarketWatch previously said.