Many Adults Share in the Challenge of Applying Tax Code When It Comes to Basic Tax Return Information
(RIVERWOODS, ILL., February 14, 2006) – With the clock ticking toward the April 17 tax return filing deadline, some taxpayers may be procrastinating because they fear taking on the complexity of the tax code. But, with just over eight weeks until income tax returns are due, taxpayers may need a crash course in deciphering tax information, according to the findings of a nationwide CCH CompleteTax survey. The survey found that the majority of adults don’t understand some of the basic tax rules that may apply to them. CompleteTax® (www.completetax.com) is an online tax preparation and e-filing service for individual taxpayers developed by CCH, a Wolters Kluwer business and a leading provider of tax and accounting law information, software and services. The survey reflects responses of more than 3,000 U.S. adult taxpayers who filed a federal tax return in the past two years.
“The ever-increasing complexity of the tax code is a challenge for most people but there are tools taxpayers can use to streamline and simplify the process of preparing and filing a tax return,” said David Bergstein, CPA, CCH business development manager.
“Taxpayers who are still using pencil and paper may want to reconsider, as good tax software walks them through the preparation of their tax return, while providing a safety net at the same time as it checks responses for errors or oversights,” said Bergstein. “And, the step-by-step plain-language question-and-answer format software uses also can shield taxpayers from difficult to understand tax-code terminology.”
The survey, which was commissioned by CCH CompleteTax and conducted by Harris Interactive®, asked a series of multiple-choice questions related to basic tax issues the average taxpayer is confronted with, from standard child credits to preparing for retirement. Among the findings:
- Child tax credit. Only 12 percent of taxpayers correctly answered that $1,000 was the maximum child tax credit allowed for 2005. In fact, more taxpayers (14 percent) believed that the maximum was $1,500. Of those with children in their household, just 24 percent of taxpayers were able to identify the correct answer of $1,000.
- Deductions for a home. Approximately one-half (49 percent) of taxpayers were able to correctly identify that attorney fees related to closing on a home were not deductible for income tax purposes. Even more concerning, more than one-third of taxpayers indicated that mortgage interest payments (35 percent), points paid on taking out a loan (39 percent) and real estate taxes (37 percent) were not potential deductions, indicating that many taxpayers may not be fully realizing all the tax benefits they could be entitled to.
- Education deductions. Not taking an above-the-line deduction that a taxpayer is entitled to means he or she is paying more than needed. And, when it comes to education costs, many taxpayers may be doing just that. Only 14 percent of taxpayers were able to correctly identify that the above-the-line deduction can be taken to offset costs of tuition and related expenses for college or other post-secondary school. When looking at responses by demographics, those aged 18-34 as well as those with children ages 13 and over were more likely to answer correctly, possibly due to either being in college, recently graduating or planning to send a child to college soon. Still, even among those who fit into these categories, fewer than one in five selected the right answer. Among taxpayers aged 18-34, 17 percent answered correctly; 18 percent of those with children aged 6-12, and 17 percent of those with children aged 13-17 answered correctly.
- Investment losses. Slightly more than one-third of taxpayers (36 percent) were able to correctly identify that losses on sales of stocks, bonds and mutual funds can be written off as losses against income. One half (50 percent) of those earning $75,000 or more were able to identify the correct answer, but just as many were not, suggesting that even those who may have more income to invest are not up-to-speed on basic tax rules related to capital gains and losses. Just as concerning, more than one in four taxpayers overall (28 percent) believe that losses on the sale of a home can be written off against income. Should real estate prices decrease, many taxpayers may be caught off guard if they find themselves selling their homes at a loss.
- Retirement plans. While Roth 401(k)s have been available for a few years, it’s clear that the majority of taxpayers still are not certain how they work. Only 20 percent of taxpayers responding to the CCH CompleteTaxsurvey were able to correctly identify that Roth 401(k)s use money you’ve already paid taxes on, but allow any future earnings to grow tax free and allow for tax-free qualified distributions. Almost as many (18 percent) thought Roth 401(k)s were funds that you invested before paying taxes, with any future earnings or distributions being taxed – which is the description of a traditional 401(k) plan. Those with incomes of $75,000 or more and those 55 years of age and over were more likely to select the correct answer (29 percent and 24 percent, respectively).
Paper, Online or Professional
The CompleteTax survey queried taxpayers who use all types of tax preparation and filing methods. Overall, 16 percent of taxpayers indicate they plan to use the traditional pencil and paper approach, while 38 percent indicate they will be going online or using packaged software and 46 percent plan to use a professional tax preparer. Those who use online and packaged tax software tend to be slightly younger (43.9 years of age on average) than those who use the manual approach (45.8 years of age on average) or a tax professional (48.5 years of age on average), according to the survey demographics. They also tend to be more highly educated, with 35 percent of those planning to prepare taxes with software having a college degree or post-college education, compared to 27 percent of those using pencil and paper and 26 percent of those hiring a professional preparer.
For those considering software, CCH’s Bergstein recommends taxpayers evaluate the program’s:
- Ease of use;
- Resources – such as expertise and thoroughness of page-specific help;
- Inclusion of a comprehensive tax guide and frequently asked questions to address a variety of tax issues;
- Fact-checking capabilities; and
- Overall value – with costs no greater than $40 for preparing and filing both a federal and state return.
About the Survey Methodology
Harris Interactive Inc. fielded the CCH CompleteTax study online from January 30 to February 1, 2006, interviewing a nationwide sample of 3,418 U.S. adults aged 18 and over, of whom 3,002 filed a federal tax return within the past two years (referred to as “taxpayers” in this release). Data were weighted to be representative of the total U.S. adult population on the basis of region, age within gender, education, household income, race/ethnicity and propensity to be online. The sampling error for the overall taxpayer sample results is plus or minus 3 percentage points. Sampling error for the various sub-sample results is higher and varies. This online sample was not a probability sample.
About Harris Interactive ®
Harris Interactive Inc. (www.harrisinteractive.com), based in Rochester, New York, is the 13th largest and the fastest-growing market research firm in the world, most widely known for The Harris Poll ® and for its pioneering leadership in the online market research industry. Long recognized by its clients for delivering insights that enable confident business decisions, the Company blends the science of innovative research with the art of strategic consulting to deliver knowledge that leads to measurable and enduring value.
Harris Interactive serves clients worldwide through its United States, Europe (www.harrisinteractive.com/europe) and Asia offices, its wholly-owned subsidiary Novatris in Paris, France (www.novatris.com), and through an independent global network of affiliate market research companies. EOE M/F/D/V
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research Network™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.