Recently, the Tax Foundation’s educational program, TaxEDU, conducted a national tax poll to gauge American taxpayers’ understanding of the tax code. The results were disconcerting: most Americans are confused by and dissatisfied with the federal tax code. This lack of understanding can lead to poor financial decisions and misguided opinions about tax policy.
More than two-thirds of respondents did not know the top federal income tax rate, and over half did not understand how tax brackets work. Furthermore, the majority of respondents answered incorrectly when asked about the value of tax credits versus tax deductions.
For instance, the top federal income tax bracket for the 2023 tax filing season was 37 percent, applicable to income of $578,125 or more for single filers, or $693,750 and above for married individuals filing joint tax returns. Only 33 percent of those surveyed answered this question correctly.
Understanding tax brackets is crucial, not only for comprehending one’s own tax burden but also for making informed decisions about additional work or new income streams. The U.S. federal income tax is a progressive, graduated rate system, where rates increase as earnings increase. The tax rate associated with your top tax bracket does not apply to all your income, just the portion that falls into that highest bracket.
When asked which was more valuable: a $1,000 tax credit or a $1,000 tax deduction, 64 percent of respondents answered incorrectly or were unsure. Tax credits directly reduce tax liability dollar for dollar, while tax deductions reduce tax liability by the amount deducted multiplied by the taxpayer’s marginal tax rate. A $1,000 income tax credit would save you $1,000 outright, while a $1,000 deduction would only reduce your taxable income by $1,000, saving you $100.
Finally, 78 percent of respondents did not know or were unsure of the share the top 1 percent of earners pay in federal income taxes: approximately 42 percent. Understanding the distribution of the tax burden can influence personal financial decision-making, conversations about taxing high earners, and even voting behavior.
These findings underscore the importance of tax literacy. As an informed taxpayer, you can make better financial decisions and contribute to more productive discussions about tax policy. Remember, education is the first step towards understanding and compliance.
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