How much do you know about taxes? To be fair, the U.S. tax code is extremely complex, but there are some things all Americans should know, such as how a tax extension works and the deadline for deductible IRA contributions. With that in mind, here's a quick six-question tax quiz most Americans wouldn't score too highly on.
- True or false? If you file for a tax extension, you can delay the due date of your payment.
- True or false? Contributions to a 529 college savings plan are tax deductible on federal income taxes.
- What is the deadline to make a tax-deductible contribution to a traditional IRA for your 2016 taxes?
- Are gambling losses tax deductible on federal income taxes?
- True or false? Mileage driven for volunteer work is tax deductible.
- True or false? You can adjust your federal tax withholdings any time of the year.
The correct answers and what Americans think
Let's see how you did. Personal finance website NerdWallet surveyed 1,800 U.S. adults and here's what they had to say.
1. True or false? If you file for a tax extension, you can delay the due date of your payment.
This is absolutely false. A tax extension delays the date your tax return is due, but any balance owed to the IRS is still due by the regular tax deadline in April. If you got this wrong, you aren't alone. Only 25% of survey respondents definitively answered this correctly: 58% said it was true, and 17% weren't sure. If you aren't sure if you'll get a refund or owe the IRS money this year, NerdWallet's tax estimation calculator could help you get a better idea.
2. True or false? Contributions to a 529 college savings plan are tax deductible on federal income taxes.
It may come as a surprise, but this is false. Only 11% of people got this one right. Rather, contributions to a 529 savings plan aren't deductible, but your earnings will be tax-free when you withdraw them to pay for college. In many cases, however, contributions are deductible on your state taxes.
3. What is the deadline to make a tax-deductible contribution to a traditional IRA for your 2016 taxes?
Forty-one percent of U.S. adults knew the correct deadline of April 18, 2017. The traditional IRA deduction is a rare tax break that you can take advantage of after the end of the calendar year. In fact, the deduction can be worth well over $1,000 on your taxes, depending on your tax bracket. This, among other reasons, is why I've called retirement saving the best tax break of all.
4. Are gambling losses tax deductible on federal income taxes?
True. Gambling losses are deductible, but you can't deduct more than you win. For example, if you win $2,000 on a slot machine, you can deduct up to $2,000 of gambling losses to offset this income. Thirty-four percent of survey respondents knew this.
5. True or false? Mileage driven for volunteer work is tax deductible.
This is true, and 61% of Americans knew this one. If you volunteer, say, at your local animal shelter, the mileage you drive there and back is tax deductible.
6. True or false? You can adjust your federal tax withholdings any time of the year.
The survey respondents did the best with this question. Seventy-one percent of those surveyed correctly knew that you can adjust your federal tax withholdings at any time of the year. In many cases, doing so may involve a simple visit to your payroll department to fill out an updated W-4.
One last important tax fact to know
Here's one that there's no excuse for not knowing, especially if you make $64,000 per year or less. There is an IRS program that provides free tax software from major companies (such as TurboTax and TaxAct) to low- to middle-income taxpayers.
Unfortunately, this program is not as well-known as it should be. In fact, more than one in three taxpayers who earned less than $50,000 hired an accountant or a tax preparation company to do their taxes last year and paid handsomely for it. Another third used commercial software that costs $69 on average.
If you fall in the sub-$64,000 income bracket, here's the IRS link where you can find all the information you need to know about doing your taxes for free.
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