TEST YOUR INCOME TAX KNOWLEDGE (2 OF 2): Most Taxpayers are Confused

Ready for part 2 of testing your income tax knowledge?? Last month I discussed tax brackets and tax refunds.? This month, I’ll be discussing two more income tax topics that many taxpayers have misconceptions about, tax rates and tax burden distribution.

CONTINUE READING AND TEST YOUR TAX KNOWLEDGE.

Marginal Tax Rates

What was the top tax rate for 2023?

The top tax rate in 2023 was 37%, and only 33% of taxpayers knew this.? I would imagine most taxpayers know their local sales tax rate, and given there are only 7 income tax rates, I would assume most taxpayers would at least know the top tax rate.? This significant lack of basic tax knowledge underscores the critical need for enhanced financial literacy programs that can equip citizens with the knowledge necessary to understand their tax obligations and rights effectively. Improving tax literacy not only helps individuals manage their finances better but also fosters a more informed electorate capable of engaging with tax policy debates knowledgeably.

Inevitably, during Presidential election years, you’ll hear the candidates discussing tax policy.? This year is no different.? As a matter of fact, there is currently a bill before the Senate (already passed in the House) which would increase the top income tax rate to 39.6%.? Given that two-thirds of taxpayers don’t know the current top income tax rate, how could they make an informed vote this November about how an increased income tax rate would affect them?

Of all the misconceptions taxpayers have about income taxes, the biggest and most common is the distribution of the income tax burden.? Stated another way, who pays the most in income taxes?

Share of Taxes Paid

I’m sure you’ve heard politicians stating everyone should pay their “fair share”.? But how do you know who isn’t paying their fair share if you don’t know where collected income taxes are coming from?? The top 1% of taxpayers pay over 42% of the total income taxes paid, and the top 10% pay 74% of the total income taxes paid.? On the flipside, 61% of US households didn’t pay a penny in income taxes.

So, I’m curious, how do you define “fair share”?? If 4 out of 10 taxpayers are paying all of the income taxes, and 1 out of 4 of these taxpayers are paying 74% of all income taxes, then the remaining 30% of taxpayers are paying about 25% of all income taxes.? Personally, I think this distribution of the tax burden is top heavy and the wealthy are paying their fair share.? Would it be fairer if 70% or 80% of taxpayers weren’t paying any income taxes?

In closing, here are a couple more statistics that show just how confused taxpayers are about income taxes:

65% of taxpayers think taxes are too high – What?? If 40% are paying all income taxes, that means 25% of the taxpayers who pay nothing think that’s too much?? Now I’m confused.

64% of taxpayers didn’t know that a $1,000 tax credit was more valuable than a $1,000 tax deduction – Given tax credits enable 60% of taxpayers to pay no income taxes, you’d think they’d know how their tax bill was being paid.

I hope you have enjoyed and learned something from this series of articles. ?Please engage with us on social media and share your experiences! Don't forget to like, comment, and share. For further inquiries and to stay updated, sign up for ARI's Newsletter here and contact ARI here.