Many Americans Can't Answer These Basic Tax Questions
— -- intro: Americans are paying their dues to the tax man this season, but many lack basic knowledge when it comes to financial tax decisions, a survey suggests.
According to one unscientific survey of 1,015 adults by NerdWallet, the average grade respondents received was an "F," answering only half of the questions correctly.
When it comes to the 10-question survey about income tax, the majority of survey respondents had the correct answers. But when it came to other types of financial decisions, including retirement, college costs and health care, the majority of people didn’t understand how to use taxes to their advantage, the survey found.
Alex McAdams, personal finance analyst for NerdWallet, said taxes aren’t just about filing your returns by the April 15 deadline.
"There are things you can do year-round to reduce your tax bill and make your money work for you," he said.
How would you score? Here are some of the questions and answers to Nerdwallet's test:
quicklist:title: Is the money you put in a Roth IRA pre-tax or post-tax?text:A) Pre-tax
B) Post-tax
C) None of the above
Answer: Roth contributions are never deductible, but all growth and earnings are tax-free. B.
quicklist:title: A 529 plan is:text:
A) A way to make tax-deductible contributions for college savings
B) A college investment plan that earns tax-free income as it grows
C) A plan that allows qualified users to defer their tax payments
Answer: 529 plan contributions are not tax-deductible on federal returns, but the income and use of the account are tax-free “as long as they are used to pay qualified higher education expenses for a designated beneficiary,” according to the IRS. However, some states do offer a tax break for 529 plans. B.
quicklist:title: What is a flexible spending account?text:
A) A tax-exempt savings account exclusively for health benefits
B) A tax-exempt savings account that allows you to make home improvements
C) A tax-exempt account for medical purposes or child care
Answer: A flexible spending account allows you to reduce your taxable income by saving for planned medical expenses or child-care costs. It’s largely a “use or lose” savings account, as only $500 of unused cash can be rolled over into the next year. C.
quicklist:title: If you foster a pet from a nonprofit charitable organization, can you claim a tax deduction?text: A) Yes, but you can only write off certain items like food, shelter and medical expenses.
B) Yes, you can write off all expenses.
C) False, you can’t write this off.
Answer: If you fostered a pet from a charitable organization, you can deduct expenses such as food, shelter, medical bills and even gas mileage if you took the pet to the veterinarian. If the expenses are more than $250, additional documentation may be required. A.
quicklist:title: If you lend money to a friend and she doesn’t pay you back, can you write it off?text: A) Yes, you can write off the entire loan.
B) Under certain circumstances, it can be deducted under capital loss rules.
C) No, you can’t write it off.
Answer: The loan becomes a capital loss. You must be able to prove that the loan has become worthless and that you had not intended to make a gift. Issuing a 1099-C, the cancellation of debt form, is also a good idea. B.
