As tax season heats up, many Americans are still unclear as to how recent changes to the law could affect them. A 2019 survey found about 28 percent say they don't understand the ins and outs of the Tax Cuts and Jobs Act, which passed in December 2017.
To take a closer look at what's confusing taxpayers, financial website GOBankingRates created a four-question quiz that covers key portions of the law. A whopping 77 percent of the 501 respondents failed, assuming, the site notes, that "a passing grade means getting more than half the questions right."
"Most Americans are in need of a refresher prior to filing their taxes," GOBankingRates concludes. "These results appear to indicate that many taxpayers are poorly informed."
Of the four questions, here is the one that most respondents got wrong:
How many different tax brackets are there for tax filers in 2019?
The answer: 7
Percentage of respondents who answered correctly: 10
A full 90 percent of quiz takers failed to answer this one correctly.
Tax reform brought changes to the seven tax brackets, which determine the rate you pay on portions of your income. Congress adjusted the rates and income levels that correspond to them.
NerdWallet: Tax brackets and rates for single filers — click to enlarge
When taxpayers filed returns in 2018, the brackets were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The brackets that apply this year are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
"Being 'in' a tax bracket doesn't mean you pay that federal income tax rate on everything you make," though, financial website NerdWallet points out in its 2018 Tax Study.
For example, if you are a single filer with $32,000 in taxable income, you'd be in the 12 percent tax bracket but wouldn't actually pay 12 percent of the full $32,000. Instead, you would pay would 10 percent on the first $9,525 and 12 percent on the rest.
If you're a single filer with $50,000 in taxable income, on the other hand, you'd pay 10 percent on the first $9,525, 12 percent on the chunk of income between $9,526 and $38,700 and 22 percent on the rest.
"The total bill would be about $6,900," NerdWallet says, or "14 percent of your taxable income, even though you're in the 22 percent bracket."
NerdWallet tax bracket example
Keep in mind that these rules apply only to federal income taxes, though, according to NerdWallet: "Your state might have different brackets, a flat income tax or no income tax at all."
If you're confused as to how tax brackets work, you're not alone: Nearly half, or 48 percent, of Americans in NerdWallet's 2019 Tax Study say they don't know what tax bracket they're in.
"It could just be a sign of the times" that Americans don't know more about their taxes, says GOBankingRates, but it's still useful to stay informed: Some filers could see lower refunds because of changes to the tax law. And about 30 million could actually owe money to the IRS.
Staying in the dark about taxes could "set you up for a potentially rude surprise when you file," says GOBankingRates, or it might cause you to "plan around a refund that doesn't materialize."
While Americans overall scored low on the quiz, the reseachers explain, older millennials did seem "more in tune with the changes included in the new bill." Respondents aged 25 to 34 had the highest passing rate at 27 percent. Those aged 55 to 64 had the lowest passing rate: 16 percent.
Test your knowledge with the full quiz.
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