1. As tax season approaches, a survey was done to gauge Americans personal finance knowledge related to U.S. federal income tax returns. Participants were asked basic tax questions related to personal finance, retirement, college savings and health care. The results were poor, with the average participants score coming in just over 50 percent out of 100. In your opinion, why are so many citizens so uniformed when it comes to taxes?
I believe this is a combination of things, starting with the complexity of the tax code. Having done tax research for 20 years, I can definitely attest to the fact that the tax code has gotten more and more complex as various laws get put into place to handle the concerns of different special interest groups. Most people versed in the tax code struggle with some of the interpretations, so how can we expect someone not versed in the code to understand it?
Another issue is the plethora of information out there regarding taxes that come from the media, blogs, and social media. While it might be considered good to have information out there, the reality is most of the tax information is out of context and ultimately does more damage than good. Several years ago tax companies were saying they could help prevent taxpayers from overpaying. The way the companies worded things people were thinking that if they over withheld then they would have to pay penalties and interest. This was not true of course, and trying to convince people was a challenge, since they had heard it on the radio!
And finally, when we look at financial literacy as a whole, we know that between a lack of focus on finances in education, the complexity of financial instruments in today’s environment, and the behavioral issues surrounding money and gratification, that many people, even if they know they should do something, do not know what to do. I had someone who wanted to pay down their bills and put money into savings since they knew this is what they should do. They planned to pay less on their credit cards so they could put money into savings, and pay down first the lower balance/lower interest accounts. This of course was the wrong way to go, and in the end would have kept them in debt for a very long time.
I had a student in one of my courses who didn’t understand why they needed to learn anything about accounting – they could just hire an accountant. This keeps accountants employed, but is part of the attitude that adds to the financial literacy in the U.S.
2. The two biggest areas of difficulty for citizens taking the tax survey were interpreting U.S. tax code and understanding proper tax deductions. What are the key things to know when approaching tax code and deductions?
This might sound a bit self-serving, however, if someone has anything that the basic instructions on the 1040 do not explain to them, they really should seek out a professional. The tax code is not written in plain English, and not written for the average person to be able to interpret. I can remember the first time I had to dig into the code, I did the research and thought I had found the answer, only to find that there was an exception to the basic answer – which is one of the problems with the tax codes – X is the answer, except for when it isn’t.
One of the reasons I promote seeking a professional is due to the number of times I have seen a new client come in only to discover that they had overpaid their income taxes due to missing deductions. Often the deductions were missing because the taxpayer misinterpreted the code. Other times the taxpayer deducted what they thought they could, based upon what they had heard in the media or on the internet somewhere.
All of this could be avoided with the help of a professional.
3. What are the best resources, free or otherwise, that tax payers can utilize to help those who are not well versed, but would prefer to do their taxes themselves?
If someone prefers to do their taxes themselves, then I would recommend Turbo Tax, and no I don’t get a commission from them! Turbo Tax is a product of Intuit, a company that has a reputation for being responsive to user’s needs.
Turbo Tax can walk a taxpayer through the process with questions designed to help taxpayers file their returns correctly. I only caution that a taxpayer who chooses to use a product to do the taxes themselves, take care to answer all the questions the software asks. Please do not skip questions or sections thinking that you don’t need that part. It might be true, but let the software figure this stuff out for you.
4. Recently, some major e-filing tax companies, including TurboTax, temporarily halted their operations amid reports of criminal attempts to obtain refunds. What risks are associated with e-filing taxes, and in your opinion, is the process of e-filing a good option for taxpayers?
E-filing is actually safer than filing by mail. The tax return is encrypted when filed electronically, preventing anyone from assessing the information should the file get hijacked. The tax return filed by mail has no such encryption, and any hijacking of the envelope leaves all information open to be stolen.
I recognize there were some issues recently, however, the speed with which the companies responded was encouraging. The companies worked to tighten up security even more, in spite of the fact that the investigations indicated that the tax preparation companies were not at fault.
5. Nearly one in every three Americans will wait until the final days to submit their taxes, according to the Internal Revenue Service. When is the ideal time to submit your taxes, and is there a benefit to submitting your taxes early?
The ideal time to file your taxes depends upon whether you are paying or getting a refund.
If you are paying, then take advantage of keeping the money in your account as long as possible and file by the April 15th due date. It won’t hurt you, and it allows you to earn a bit more interest.
If you are getting a refund, file as early as possible, (once you have all the proper tax forms), so that you can get your refund back sooner and earn the interest on the money yourself. Since most people do tend to wait until April 15th, filing earlier means that there are less returns being processed and your refund is less likely to get delayed.As a side note, I know many people use their taxes as a savings account, and I’d like to say a few words on this. The ideal situation is when we file our returns we are paying a small amount. When we get these huge refunds, it means that we did not have use of the money during the year, and any interest possible to be earned on the money is lost.
Many people tell me that they cannot save and so they use the tax refund as their savings account. They could take the extra money that is being withheld in taxes, and have it put into a mutual fund/savings account/money market account – anything that would earn them something on the money, rather than the government.
Alisa Hunt is the Academic Program Manager for the Master of Science in Accounting Program at Post University. Hunt earned a B.S. in Business Administration with an emphasis in Finance from National University an M.S. in Education from Capella University and a Ph.D. in Education from Cappella University. Hunt has been in the business world for 20-plus years, as a business owner, and in leadership positions in various organizations. Currently, she owns a consulting and training company where she trains and consults with business on issues from Accounting and Finance to Diversity and Creativity.