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NerdWallet’s Tax Quiz: 3 Important Lessons From the Results

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Americans don’t know nearly enough about their personal income taxes. This was made painfully clear by the results of a recent online tax quiz from NerdWallet, an online financial website. The average score for people taking the quiz was 51 percent. There are a handful of reasons why Americans scored this poorly, which shines light on a few important lessons that both taxpayers and the government can take away from the results.

Lesson 1: Americans Understand What They Deal With Regularly

Some of the questions on the NerdWallet quiz had better results than others. In particular, Americans did well answering questions about parts of the income tax code that they deal with regularly.

For example, the majority of respondents showed a good understanding of the rules for setting up tax withholdings on their paychecks. They knew about the ability to change the amount that is withheld from each paycheck during the year by updating their Form W-4 with their employer. They also knew that ideally, their tax refund should be $0 because that would mean their withholdings were just right and they weren’t overpaying the government throughout the year.

These results are encouraging because they show that the average person does understand parts of the tax code, so they have the potential to learn — and understand — the other parts.

Lesson 2: Americans Don’t Understand Benefit Programs, Which Is a Serious Problem

The results of the quiz were concerning because they showed that Americans don’t understand nearly enough about benefit programs. Less than half of respondents knew the tax rules for the Roth IRA and the 529 plan. This is a serious concern because the Roth IRA is one of the most effective ways to save for retirement. It avoids taxes on all investment earnings, which is a huge tax break. The 529 plan is also a useful program because it allows Americans to avoid taxes on investments for college savings. Those who open an account may be eligible for state tax deductions, too.

This is a sign that Americans aren’t using these programs often enough, which means they aren’t taking full advantage of opportunities to save money. This makes it harder for anyone to reach their financial goals. Taxpayers should make more of an effort to learn about their available benefit programs, and the government should be doing more to promote and explain these helpful programs.

Lesson 3: The Tax Code Is Bizarre, So It’s No Wonder Why Americans Don’t Understand Everything

There were also some questions on the NerdWallet quiz that were challenging, so it’s no wonder why people got them wrong. If anything, this showed how complicated some parts of the tax code can be. For example, most people didn’t know they could deduct sex reassignment surgery, gambling losses, and babysitting expenses (if they are working for a charity).

People also didn’t know whether they could deduct the loss from a loan to a friend that never gets repaid. The answer is yes, but as a capital loss, and only if the taxpayer proves the situation and submits a Form 1099-C with their tax return to cancel the debt. This law even confuses some accountants.

The fact that NerdWallet could easily come up with these out-of-the-ordinary situations and questions shows that the income tax code is overly complicated. The IRS should simplify laws so that Americans can focus on the information they actually need to know.

Overall, the results of the NerdWallet’s quiz were disappointing, but there were some silver linings. Hopefully, both Americans and the government take these lessons to heart so there is a better understanding of taxes in the future.