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Millions of Americans file taxes every year in a process that might fill more than a few people with anxiety and confusion.
Part of the stress could be related to people’s lack of familiarity with how tax rules work. That’s no blame, considering the arcane twists and turns of an intricate tax code that changes with new laws, and has certain provisions pegged to inflation rates.
“As Tax Day approaches, MarketWatch has come up with a quiz to test reader knowledge.”
Aggravation about tax-code complications is rising, by one count. More than one half of people (53%) say the tax code’s complexity bothers them a lot, according to a Pew Research Center poll released in early April. That’s up from 47% in 2021 who said the convoluted code frustrated them a lot.
But a little bit of understanding can help — at least a bit. As Tax Day approaches, MarketWatch has come up with a quiz to test reader knowledge.
Sure, a brief quiz explains just a fraction of a fraction about taxes these days. And a better understanding of taxes might or might not boost a refund payment. But some extra knowledge might take some of the sting and guesswork out of the process.
And if you pass with flying colors, try this MarketWatch quiz to test your savvy in other parts of your financial life.
Good luck!
The questions
1. Why is Tax Day on April 18 this year instead of April 15?
a. Because of extra time needed to process income tax returns and field phone calls from taxpayers.
b. Because of calendar quirks. April 15 is a Saturday, while Monday, April 17, is a holiday in Washington D.C.
c. Trick question — Tax Day falls on April 15 this year, as it does every year.
2. What’s generally better for lowering taxes, a tax credit or a tax deduction?
a. A tax credit, because a credit is a direct, dollar-for-dollar reduction on the tax liability, i.e. the tax bill. A tax deduction lowers taxable income before the tax bill is calculated.
b. A tax deduction, which lowers taxable income before the current tax bill is calculated while the tax credit is a credit to taxes owed in future years, and reduces tax liability at a later date.
c. They both have an equal impact.
3. The IRS says it usually issues refunds how long from the time a taxpayer electronically files a return?
a: Up to 21 days.
b. Up to 7 days.
c. Up to 14 days.
4. Filing an extension gives you more time to pay any owed taxes, true or false?
a. True. The extension allows six extra months on the filing and payment obligations, on the condition that the IRS agrees to a payment plan.
b. False. The extension allows for up to six extra months to file a tax return, but payment is due though the IRS can set up installment plans for people who cannot pay the full amount of taxes owed. This year, Monday, Oct. 16, is the deadline for tax year 2022 returns submitted after getting an extension.
5. For overdue taxes, the consequence of failing to pay taxes is more harsh than the consequences of failing to file a tax return, true or false?
a. False. The “failure to pay” penalty is worth 0.5% of the amount of unpaid taxes per month, or part of the month, where the taxes are not paid. The “failure to file” penalty is 5% of the unpaid tax per month or part of the month where the taxes are not paid.
b. True. The “failure to pay” penalty is worth 5% of the amount of unpaid taxes per month, or part of the month, where the taxes are not paid. The “failure to file” penalty is 0.5% of the unpaid tax per month or part of the month where the taxes are not paid.
6. On average, what’s the size of income tax refunds through the end of March, according to the IRS?
a. $2,010.
b. $2,910.
c. $3,010.
7. What is “bracket creep” ?
a. Slowly expanding tax brackets that creep into wider ranges of taxable income.
b: “Bracket creep” is a tax-planning strategy to reduce taxable income so that the taxpayer only creeps incrementally into higher tax brackets.
c. “Bracket creep” can happen if inflation pushes up household income without tax-code adjustments. Yearly adjustments can push income-tax brackets higher to account for inflation and rising costs.
d. Radiohead’s tongue-in-cheek tax time cover of its own 1992 hit song “Creep.”
8. What is “tax-loss harvesting” ?
a. Tax-planning strategies for farmers and agribusiness related to rises and falls in commodity prices.
b. An IRS program that reviews gathers all declared capital losses and reviews for accuracy.
c. The tax-planning strategy enabling deductions for pandemic-era losses of business income and household income.
d. The tax planning strategy of taking or “realizing” many capital losses and using the losses to offset capital gains.
9. What percentage of taxpayers chose to take the standard deduction last year instead of itemizing their deductions?
a. Around 75%.
b. Around 50%.
c. Around 35%.
d. Around 90%.
10. If you take the standard deduction, which one of these deductions can you still take?
a. The student-loan interest deduction.
b. Mortgage-interest deduction.
c. Gambling-loss deduction.
d. State and local taxes.
e. Charitable-contribution deduction.
The answers
b. Because of calendar quirks. April 15 is a Saturday, while Monday, April 17, is a holiday in Washington D.C.
2.
a. A tax credit, because a credit is a direct, dollar-for-dollar reduction on the tax liability, i.e. the tax bill. A tax deduction lowers taxable income before the tax bill is calculated.
3.
a: Up to 21 days.
4.
b. False. The extension allows for up to six extra months to file a tax return, but payment is due though the IRS can set up installment plans for people who cannot pay the full amount of taxes owed. This year, Monday, Oct. 16, is the deadline for tax year 2022 returns submitted after getting an extension.
5.
a. False. The “failure to pay” penalty is worth 0.5% of the amount of unpaid taxes per month, or part of the month, where the taxes are not paid. The “failure to file” penalty is 5% of the unpaid tax per month or part of the month where the taxes are not paid.
6.
b. $2,910.
7.
c. “Bracket creep” can happen if inflation pushes up household income without tax-code adjustments. Yearly adjustments can push income-tax brackets higher to account for inflation and rising costs.
8.
d. “Tax-loss harvesting” is a tax-planning strategy of taking or “realizing” many capital losses and using the losses to offset capital gains.
9.
d. Around 90%.
10.
a. You can take the student-loan interest deduction (in addition to the standard deduction).
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