Taxpayers Unaware of Tax Breaks May Make Costly Mistakes
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Most taxpayers are concerned they may be making costly mistakes or overlooking tax breaks that could save them money, according to findings from a nationwide TaxEdge TaxEdge survey. Nearly two thirds of all individual taxpayers fear overlooking tax breaks or making mistakes that could cost them fines or penalties, based on the results of a random survey of more than 1,000 adults. Adding validity to their fears, the survey also found that most taxpayers don't understand which tax breaks may be most beneficial to them. "It's always important for taxpayers to understand what they can do to minimize their tax obligation, but it's even more crucial in tough economic times when people are watching every penny," said David Bergstein, CPA, a tax analyst for TaxEdge TaxEdge, an online tax preparation and e-filing service for the do-it-yourself taxpayer. "Yet, many people are simply not up-to-speed on tax rules, which may mean they are paying more in taxes than required." Specifically, the TaxEdge TaxEdge survey asked taxpayers about basic tax breaks. Most taxpayers were generally unable to understand the added value of a tax credit over a tax deduction. They were unable to identify the most beneficial tax breaks tied to various life events, such as raising children or sending children off to college. For example:
Tax Credits v. Tax Deductions Fewer than one in four individuals (22 percent) were able to answer correctly that a tax credit is generally more advantageous than a tax deduction of the same value, according to the survey. "Tax credits save you more than tax deductions because they reduce your tax bill dollar for dollar," said Bergstein. A taxpayer in the 25-percent tax bracket, for example, claiming a $2,000 credit will reduce his tax bill by $2,000. However, if he claimed a $2,000 deduction, he will only reduce his tax bill by $500. Child-related tax breaks When asked to identify which child-related tax break offers the typical taxpayer the greatest savings, only about one-third (36 percent) identified the child credit, which generally is most likely to yield the greatest tax break to most taxpayers. One in four (24 percent) selected the dependent and child care credit and 23 percent selected the personal exemption. The remainder of those surveyed said they did not know the correct answer. Exemptions are similar to deductions in that they remove a certain amount of a taxpayer's income from being taxed. However, unlike credits, they are not a dollar-for-dollar reduction in a person's tax bill. So even though the personal exemption for a parent with a child under 19 or a full-time student under 24 is $3,500 for 2008, the tax savings for someone in the 15-percent tax bracket, for example, would amount to only $525 ($3,500 x 15%). The dependent and child care tax credit ranges from 20 percent to 35 percent of expenses for the first $3,000 in care for a child up to age 13 or an older child who is physically or mentally challenged. This can result in a tax savings of $600 to as much as $1,050 for someone with a very low income. The $1,000 child credit is available to taxpayers with a child under age 17. Income restrictions apply to each. "Raising children is expensive. But it's significantly more costly if you are not aware of or taking advantage of the tax breaks for which you may be eligible," said Bergstein. Higher education tax breaks The survey found that people overwhelmingly leaned toward the tuition and fees deduction over the credits as offering the most tax savings. Specifically, two in five respondents (41 percent) said a deduction for college tuition and fees will save a qualifying taxpayer the most compared to only 16 percent choosing the Hope Credit and 14 percent the Lifetime Learning Credit as the bigger tax breaks. The remaining 29 percent said they did not know. However, the Hope Credit and the Lifetime Learning Credit would likely offer a qualifying taxpayer a bigger tax break than the deduction for college tuition and fees. The Lifetime Learning Credit is $2,000 per return based on expenses for post-secondary education and the Hope Credit is up to $1,800 per student based on expenses in the first two years of post-secondary undergraduate education. The deduction for college tuition and fees is up to $4,000 for qualifying taxpayers. Income restrictions apply to both the deduction and credits. As a result, if a taxpayer in the 15 percent tax bracket, for example, takes a $4,000 tuition and fees deduction, the tax savings would be only $600. In comparison a Lifetime Learning Credit of only $2,000 would reduce a qualifying taxpayer's tax bill by the full $2,000. The benefit of a credit is a dollar-for-dollar offset rather than the percentage reduction in tax that a deduction provides. "Tax rules also change so it's important to keep current. For example, for 2009 and 2010, the Hope Credit is being renamed the American Opportunity Tax Credit; the credit amount is increasing and the coverage expanding," said Bergstein. "So, it's important to stay current so that you can maximize your tax savings."
Posted April 6, 2009. |
