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Working Americans' Lack of Tax Know-How Is Costing Them in a Big Way, Study Shows

By Sean Williams – Feb 7, 2016 at 6:39AM

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Working Americans are leaving a lot of money on the table come tax time, according to this survey from the United Way.

Image source: Pixabay. 

Ladies and gentlemen, it's that time of the year most working Americans have come to love and hate: tax time.

For most Americans, tax time is a complete hassle, because it means digging into every nook and cranny of your finances from the previous year and plowing through piles of receipts. For a select few, it also means cutting a check to Uncle Sam. But, for many Americans tax time has a positive connotation in that it means a refund from the federal government. About 80% of tax filers wind up with a refund from the federal government every year.

Working Americans are leaving money on the table come tax time
Despite the data showing that most working Americans net a refund at the end of the year, a new survey from the United Way demonstrates that a lack of knowledge come tax time could be costing American taxpayers a lot of money that they could be rightfully due.

The 14-question survey, which was conducted in November on United Way's behalf by Lightspeed GMI, included a national sample of 1,000 adult working taxpayers who were earning less than $62,000 annually (we'll get to the importance of that figure in a moment). The results showed that most low-income and middle-income working Americans really don't have a good grasp of what tools could help them land a bigger refund, or how they can save extra cash.

Image source: Pixabay. 

Stop paying for tax preparation
For starters, 942 respondents were asked whether they were aware of the fact that they were eligible for a free tax return preparation service from United Way known as MyFreeTaxes. In total, 72% of respondents said they were not.

There's clearly some bias present in this survey because it was conducted on behalf of United Way, but the fact remains that 29% of those surveyed paid an accountant or tax professional to prepare their taxes in 2014 when they didn't have to. That's throwing money away! As United Way notes, its MyFreeTaxes software (which works via mobile app as well) can be accessed for free for federal and state preparation by individuals earning less than $62,000 annually.

Of course, United Way isn't the only entity offering to help taxpayers prepare their filing. The IRS has a handful of free tax preparation alternatives, which are particularly helpful for senior citizens. Tax Counseling for the Elderly is a program geared at providing IRS-certified volunteers to help those ages 60 and up prepare their taxes. Best of all, many of the volunteers are often senior citizens themselves, so they understand the common deductions and credits that seniors will be looking to take advantage of.

The Volunteer Income Tax Assistance program is also designed to provide IRS-certified volunteers to help persons making $54,000 or less annually, as well as the disabled, prepare and file their taxes.

Image source: Flickr user Sebastiaan ter Burg.

Understand your tax credits!
In addition to nearly 1 in 3 Americans surveyed unnecessarily paying a tax professional to prepare and file their taxes, United Way's survey asked 1,000 respondents what tax credits they were aware of out of a list of seven. The number in parenthesis next to these tax credits represents how many respondents claimed to know about them:

  • Earned Income Tax Credit (57%)
  • Mortgage Interest Credit (45%)
  • Child Tax Credit (42%)
  • Child & Dependent Care Tax Credit (38%)
  • Health Coverage Tax Credit (31%)
  • Low-Income Housing Credit (19%)
  • Lifetime Learning Credit (13%)

These numbers are downright scary -- and nearly 1 in 5 (19%) respondents had not heard of any of these seven tax credits.

For low-income tax filers, the Earned Income Tax Credit can be particularly beneficial since it can reduce their taxable income. It's best to view the IRS' webpage to determine whether or not you'll qualify, but it's also important to understand that even if your taxable income has been reduced to zero, the EITC can still net you a refund. The IRS estimated three years ago that roughly 20% to 25% of people eligible to receive the EITC weren't getting it, likely because they were unaware that they needed to file a return, or because they didn't realize it was an option available to them. 

The Child Tax Credit, which 58% of respondents were unaware of, is another credit that could have a substantial impact on your refund. Again, you'll want to want to visit the IRS' website to determine your own eligibility; but if you do meet the requirements, each qualifying child could be worth as much as a $1,000 tax credit.

Between the EITC and the Child Tax Credit, working Americans could wind up netting huge tax savings that many right now might be passing up.

Image source: Pixabay.

One important figure worth noting
Lastly, it's worth mentioning that United Way's survey also asked all 1,000 respondents how they usually spend their tax refunds.

Each respondent was given 15 choices, and multiple selections were allowed. Utilities (31%), food (23%), and housing costs (22%) were not surprising finds near the top of the list. However personal finances (25%), which includes savings, banking, and investment accounts, trailed only utilities, and that's not only surprising, but encouraging. I know 25% doesn't sound like a lot, but this survey was conducted on working Americans making a moderate to low amount of annual income, and saving for their future isn't always easy. The presumption is that if these individuals familiarize themselves with the tax credits that may be available to them, and they do indeed net bigger refunds from the federal government, the amount of money being funneled into savings and investment vehicles could jump much higher.

Tax Day is still over two months away, but that doesn't mean you have to procrastinate until the last day to brush up on your tax knowledge. If this survey has shown anything, it's that making the effort to become more knowledgeable about your tax situation could pay off many times over.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

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