(MONEY Magazine) – While Americans are lions at terrifying Congress and the President into clamoring for a tax cut, many are turkeys when faced with a tax IQ test. That's the unavoidable conclusion of a new Money telephone poll of the general public. Although 40% of a typical American household's gross income is devoured by taxes, we found a startling level of ignorance about the tax law among the nearly 500 adults surveyed nationwide by ICR Survey Research Group of Media, Pa. (margin of error: plus or minus 4.4%). As a result, in the rest of this story we've provided guidance on the most glaring lapses as a service to you. But first, ponder these telephone poll results:

Not one of the respondents answered all 20 questions correctly. On average, they scored a 47 out of 100, a clear flunk. What's even more disheartening: They obviously don't grasp many essential tax points.

Roughly a third could not recognize three of the juiciest deductions: for mortgage interest, property taxes and home-equity-loan interest.

And nearly a third didn't realize that interest on a personal car loan is not deductible.

Two questions drew correct answers from the most impressive majority of respondents: 95% knew that everyone paying taxes is not in the same tax bracket and 74% wisely answered that credit-card interest is not deductible. The biggest blind spots: rules about the child-care credit, tax-free gifts and the admittedly tricky ins and outs of paying quarterly estimated taxes. A sizable percentage of people were also puzzled by the tax rules concerning municipal bonds, student loans and capital gains.

From my dealings with clients as a professional tax preparer, I wasn't too surprised to see that men generally knew more about taxes than women. And you might have guessed that Republicans are smarter about the tax law than Democrats. But I was startled to see that people age 65 and older fared worse than all other age groups--answering only 37% of the questions correctly. One possible explanation: Many of them have such limited sources of income that they need only file a short form, so they don't have to know the rules about 1040 long-form write-offs.

Before sending in your 1994 tax return, test your own tax IQ with our questions, which appear with the correct answers below. Learning the tax rules could wind up saving you a bundle in federal income tax for '94 and beyond:

Which is more valuable, a $1,000 deduction or a $1,000 credit? Deductions and credits are the chief ways to spell tax r-e-l-i-e-f, but as only 44% of respondents knew, the more effective by far are credits. That's because they reduce your tax dollar for dollar: A $1,000 credit saves you $1,000 in tax. Deductions, by contrast, reduce your taxable income so that only a percentage of your expense gets recouped as tax savings. If you're in, say, the 28% tax bracket for '94 ($38,001 to $91,850 for married couples, $22,751 to $55,100 for singles), a $1,000 deduction saves you $280 in tax--$720 less than a $1,000 credit.

What is the main tax advantage of investing in municipal bonds? Easy: The interest earned on the bonds is generally free from federal income tax. It's also exempt from state and local taxes if you live in the state where the bonds are issued. Because your federal income tax bracket is higher than your state bracket, the federal exemption is the main reason to buy muni bonds, as just 37% of those surveyed recognized. For example, if you're in the 31% federal bracket and the 8% state bracket, a $10,000 muni bond that pays 5% interest will save you $155 in federal tax but only $40 in state tax. Contrary to what most people thought, the capital gain from selling a muni bond for a profit is taxed--up to the current top capital-gains rate of 28%.

Why does an investment in a tax- sheltered retirement account, such as an IRA or a 401(k), grow faster than the same investment held outside such an account? Only 38% knew that retirement plans produce dramatic results because their earnings grow tax-free. Tax normally gnaws away at investment earnings the way wind and water wear down stone. Want proof? Let's say you contribute $2,000 a year to an IRA growing 6% tax-free annually. In 20 years, your $40,000 would balloon to $73,571. The same $2,000 invested every year, say, in a top-yielding taxable money-market fund earning 6% would grow to only $60,429, if you are in the 31% bracket.

Which could be higher--the tax rate on bank CD interest or on a capital gain from selling stock? Only a third knew that the tax rate on bank CDs could be higher. If you hold on to your stock for more than a year, your gain can't be taxed higher than 28%. Earn interest on a CD, however, and the top rate will depend on your total taxable income--up to 39.6% if your '94 taxable income was over $250,000.

When should you itemize deductions? As just 38% of those polled knew, it makes sense to itemize deductions only when they exceed your standard deduction, an allowance based on your filing status. That's because you may either claim the standard deduction or itemize your own deductible expenses, and you naturally want to take the larger write-off. For '94 returns, the standard deduction is $6,350 for married couples filing jointly, $3,800 for singles and $5,600 for heads of household. You must file the 1040 long form to itemize.

Is interest on student loans deductible? No, as a mere 35% of our respondents correctly answered. Under the 1986 tax reform law, interest on student loans is considered personal interest and therefore not deductible.

Is interest on credit cards tax deductible? Most people (74%) got this one right. You can't write off the interest on your credit cards--one more reason to keep your charging in check.

How much of the cost of unreimbursed business meals and entertainment expenses can a taxpayer deduct? If you said 80%--as about one in five polled did--you don't know about a key change in the 1993 tax law. Since Jan. 1, 1994, only 50% of business meals and entertainment expenses are deductible. What's more, if you are an employee, you can write off meals and entertainment only to the extent that those expenses plus any other miscellaneous deductions exceed 2% of your adjusted gross income.

When must you pay estimated tax? A striking 80% didn't understand that the answer depends on how much tax you owe after subtracting your withholding. You must make quarterly estimated tax payments to the IRS this year if you expect to come up with a tax due of $500 or more at the end of 1995 and your withholding won't cover 90% of your '95 tax (or 100% of your '94 tax, whichever is less). This year, estimated payments are due on April 17, June 15 and Sept. 15, with the last one on Jan. 15, 1996.

Which is deductible as a charitable contribution: 1) the cost of church raffle tickets; 2) a $500 gift to needy relatives; or 3) out-of-pocket expenses of doing volunteer work for charity? Less than half (45%) knew that No. 3 was the right answer. Examples of deductible expenses include 12¢ a mile for driving your car for charity, the cost of out-of-town travel, and telephone calls.

Which of the following does the IRS consider a home improvement, whose cost can be added to your property's original purchase price to reduce the gain when you sell: exterior painting done three years before the sale or landscaping? The correct answer, as 45% knew, is landscaping. That's because making your property lusher look ing adds to its value and is thus deemed by the IRS to be an improvement. Painting, by contrast, is part of upkeep.

Suppose your father gave you stock worth less than $10,000 at graduation. What should you report on your tax return? Of those surveyed, 56% actually think they would have to report the gift as income. Yet gifts are never taxable to the recipient. Tax is paid by the giver-but only if the value of annual gifts to one person exceeds $10,000.

True or false: All Americans must file income tax returns. If you have no income, our government sees no reason for you to file a return. The same is true if your income is so low that your standard deduction and personal exemption will reduce your tax to zero. But a full 62% of people surveyed said they would send in returns no matter what. Fact is, for 1994 returns, you generally can skip filing if you earned less than $11,250 and are married filing jointly, $6,250 if you're single, and $8,050 if you qualify as head of household--an unmarried taxpayer who maintains a household for a child or a dependent relative. For the elderly age 65 or older, the thresholds are even higher (an additional $950 for singles and heads of household and $1,500 more for couples filing jointly). Naturally, there are some exceptions to these rules. You must file a return if: You had self-employment net earnings of $400 or more; you're a dependent child with unearned income over $600; or you owe the alternative minimum tax, which is aimed at high-income individuals who enjoy fat write-offs.

True or false: Anyone who works, has a child under 18 and pays for child care may claim a child-care credit. This was our only trick question, which may be why only 20% knew the correct answer is "False." It's true that the child-care credit is available if you pay someone to take care of your kid so you can work. But your child must be under age 13, not 18. Expenses are limited to $2,400 for one child, $4,800 for two or more children.

Which is the lowest federal tax bracket you can be in and still pay income tax: 15%, 28%, 31%, 36% or 39.6%? Just under half of respondents knew that the lowest tax bracket is 15%. And the rest probably wish they were still in it.

--Mary L. Sprouse

Mary Sprouse is the author of The Money 1995 Income Tax Handbook (Warner Books, $13.99).