Test Your Tax Ability
As the dreaded 15th of April draws closer, tax your brain, not your assets, with this quiz
(MONEY Magazine) – 1. Great Expectations This year the IRS expects that more than half of all taxpayers will:
a. Make math errors or other mistakes on their returns.
b. Pad the deductions they claim for unreimbursed business expenses and charitable contributions.
c. Curse under their breath after spilling coffee on their W-2 forms.
d. File their returns electronically.
2. Quicker Refunds You've got bills piling up and want your tax refund in a hurry. Besides filing your return electronically, what is your best hope of getting the money quickly?
a. Get an "instant money" refund-anticipation loan from your tax preparer.
b. Take out a cash advance on your credit card in the amount of the refund, then pay off the bill in a few weeks when you get your check from the IRS.
c. Get an advance from your cousin Vinnie the bookie (hey, he's family, after all).
d. Keep your fingers crossed that the U.S. Postal Service isn't swamped.
3. Medical Deductions Which of the following medical expenses can you legally deduct?
a. False teeth and wigs
b. Face-lifts and hair transplants
c. Electrolysis and teeth whitening
d. Health-club dues and fitness equipment
4. Car Donations If you give a used car to charity this year, what amount can you legally deduct?
a. The blue book value of that model
b. The fair market value, adjusted for wear
c. The amount the charity gets after selling it
d. The amount you estimate the car is worth
5. Tax Scams Can you sort out the myths from the facts? One of these claims is true; the others, if acted on, would get you a very nasty letter from the IRS.
a. African Americans can claim substantial tax refunds as reparation for slavery.
b. Using the Corporation Sole statute, a.k.a. the bishop ruse, savvy taxpayers can get the same exemption from federal income taxes as some leaders of religious groups.
c. You may be legally entitled to deduct the full amount of your wages as "a necessary expense for the production of income."
d. You may be eligible to get a tax credit from the IRS, even if you don't pay any taxes.
6. Alternative Minimum Tax If you're wealthy or unfortunate enough to be snagged by the ever-spreading tentacles of the alternative minimum tax, you should:
a. Figure out your regular income tax and the AMT, and pay whichever amount is greater.
b. Figure out both, and pay whichever is lower.
c. Figure out both, as well as the tax of your next-door neighbor, and pay whichever one is the least confusing.
d. Pay your regular income tax; the IRS will contact you if you owe the AMT instead.
National taxpayer advocate Nina Olson, Joe and Jane Taxpayer's point woman within the IRS, contends that "the largest source of compliance burdens for taxpayers and the IRS alike is the overwhelming complexity of the tax code." How long was the Annual Report to Congress in which Olson's plea for simplification initially appeared?
a. 1 page b. 44 pages c. 287 pages d. 717 pages
1. d Compared with mailing your return to the IRS, filing electronically has lots of advantages (d), which helps explain its growing popularity. Chief among them: If you're due a refund, you get your check in half as much time as paper filers. Plus, using the software necessary for e-filing gives you step-by-step guidance on filling out your return and automatically checks your math (which cuts down on those errors). In the past, the cheapskate in you may have balked at buying the software or paying the small fees attached to the e-filing option. Now most taxpayers can do it all for free by going through the IRS website at irs.gov/efile. There you'll find links to various tax sites--including those of H&R Block and Intuit, the maker of TurboTax--offering free versions of their basic commercial tax preparation software and electronic filing option.
2. b Borrowing against your credit card isn't a great option, but it's certainly faster than waiting for a check in the mail (b) and a whole lot cheaper than the other options. That includes the instant-money loans dangled by tax preparers like H&R Block and Jackson Hewitt. This year taxpayers who opt for a refund-anticipation loan will typically shell out about $100, according to a study by the Consumer Federation of America and the National Consumer Law Center. With the average refund just north of $2,000, that means impatient taxpayers are being charged an effective annual percentage rate of 187% on money they could get directly from the government in as little as two weeks. A much better solution? Adjust your withholding so you pay Uncle Sam only what you actually expect to owe. Visit irs.gov and do a search for "withholding calculator" to figure out the correct amount, or call 800-829-1040 for help. And pledge to file your return earlier next year: If you still expect a refund, you'll get your check faster if you file near the beginning of tax season, when the IRS has fewer returns to process, than near the end, when the agency is inundated with 1040s.
3. a Yep, you can deduct false teeth (a). But not whiter ones. While some of the IRS distinctions about allowable deductions are subtle, they follow a general logic: The cost of doctor-approved treatments for specific diseases and conditions is deductible, while money spent to improve your looks or general health is not. So you can deduct the cost of a weight-loss program if your doctor diagnoses hypertension, but not if you're simply worried that your posterior looks like an ottoman. Similarly, you can deduct the cost of a wig "purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease," but you can't deduct the cost of hair transplants, hair removal or most kinds of cosmetic surgery. More important than all these subtle distinctions: You can deduct only medical and dental expenses that exceed 7.5% of your adjusted gross income, which means most of us won't be deducting any.
4. c You'll have to wait for the charity to sell your old set of wheels (c). Until this year, the IRS was pretty lenient about allowing deductions for cars donated to charity. While it warned taxpayers not to claim the full blue book value for cars in less than perfect condition, the agency gave donors considerable leeway in assigning a fair market value for vehicles worth less than $5,000. Trouble was, this meant taxpayers who donated cars often got a much bigger benefit from unloading their old clunkers than the charities they were ostensibly helping. So starting this year, the IRS will allow donors to deduct only the gross proceeds from the actual sale of the vehicle. If you have questions about donating a car or any other tangible goods to charity, download Publication 561, "Determining the Value of Donated Property," at irs.gov.
5. d As many as 25% of the households that are eligible for the earned income tax credit don't claim it (d), thereby passing up billions of dollars in tax aid each year. The EITC is designed to help those living near the poverty line; families with a total income of less than $35,000 and with two or more children may be eligible for more than $4,000 in tax credits, even if they don't owe any taxes. While these legitimate credits go unspoken for, other taxpayers are pinning their hopes on the false, false and false tax-cut strategies outlined in the first three answers. They're all on the IRS list of the top tax scams currently being marketed by unscrupulous operators promising greedy or gullible taxpayers the chance to "untax" themselves at Uncle Sam's expense. (For details, you can look up the "dirty dozen" list on irs.gov.)
6. a If you don't know that the answer is (a), you need to do some reading up on the phantom menace known as the alternative minimum tax (see "The Tax of Unintended Consequences," money.com/amt2003). First enacted in 1969, the AMT was designed to ensure that the superrich couldn't wriggle out of paying their fair share of taxes. But unlike the regular income tax, the AMT was never indexed to inflation, so it's now snaring an ever-growing number of the not-so-rich too. If the law isn't changed, nearly a third of all taxpayers will likely fall under the AMT by 2010, according to estimates by the Urban-Brookings Tax Policy Center. You can use H&R Block's calculator at hrblock.com/taxes/tools /amt to estimate whether you're likely to be among them this year. (If you use tax preparation software, this calculation will be done for you automatically.) If you avoid the issue and simply fill out your regular income tax return and pay that amount, and the IRS later determines that you fell under the AMT and didn't pay it, you'll be liable for interest and penalties, in addition to the extra tax you owe.
d. The two volumes of the national taxpayer advocate's 2004 Annual Report to Congress came in at 717 pages (d), only 66 pages shorter than the 783 pages of James Joyce's modernist doorstop Ulysses. Though to be completely fair, Olson's report is much easier to understand.