Taxpayers’ Fears of Errors and Oversights May Be Well Founded, CCH Survey Finds

Most people do not know which tax breaks offer the greatest benefits; in tough economic times they may be making costly mistakes

(RIVERWOODS, ILL., March 16, 2009) – Most taxpayers are concerned they may be making costly mistakes or overlooking tax breaks that could save them money, according to findings from a nationwide CCH CompleteTax® survey.

The survey of more than 1,000 U.S. adults, commissioned by CCH and conducted by GfK Roper, found that n early two in three (66 percent) taxpayers fear they may overlook tax breaks or make mistakes that could cost them in fines or penalties. At the same time, most taxpayers also were unable to determine which tax breaks may be most beneficial, indicating their concerns about costly oversights or mistakes may be well founded.

“It’s always important for taxpayers to understand what they can do to minimize their tax obligation, but it’s even more crucial in tough economic times when people are watching every penny,” said David Bergstein, CPA, a tax analyst for CCH CompleteTax, an online tax preparation and e-filing service for the do-it-yourself taxpayer. “Yet, many people are simply not up-to-speed on tax rules, which may mean they are paying more in taxes than required.”

Specifically, the CCH CompleteTax survey, also discussed in a podcast today, asked taxpayers about basic tax breaks. In each instance less than one-half of taxpayers were able to identify the most beneficial. For example:

• Less than one-fourth could identify that tax credits are generally more advantageous than deductions;
• Only about one-third identified the child-related tax break offering the greatest savings; and
• Less than one-half identified the education-related tax break offering the greatest savings.

In addition, only about one-half of taxpayers report they are planning to contribute to tax-advantaged retirement plans in 2009, and the vast majority of taxpayers still perceive that getting a tax refund is better than owing taxes on April 15.

Take Credits When Eligible

Fewer than one in four individuals (22 percent) were able to answer correctly that a tax credit is generally more advantageous than a tax deduction of the same value, according to the survey.

“Tax credits save you more than tax deductions because they reduce your tax bill dollar for dollar,” said Bergstein.

A taxpayer in the 25-percent tax bracket, for example, claiming a $2,000 credit will reduce his tax bill by $2,000. However, if he claimed a $2,000 deduction, he will only reduce his tax bill by $500.

Know About Other Tax Breaks

Taxpayers also were generally unable to identify the most beneficial tax breaks tied to various life events.

Child-related tax breaks

When asked to identify which child-related tax break offers the typical taxpayer the greatest savings, about one-third (36 percent) identified the child credit, which generally is most likely to yield the greatest tax break to most taxpayers. One in four (24 percent) selected the dependent and child care credit and 23 percent selected the personal exemption. The remainder of those surveyed said they did not know the correct answer.

Exemptions are similar to deductions in that they remove a certain amount of a taxpayer’s income from being taxed. However, unlike credits, they are not a dollar-for-dollar reduction in a person’s tax bill. So even though the personal exemption for a parent with a child under 19 or a full-time student under 24 is $3,500 for 2008, the tax savings for someone in the 15-percent tax bracket, for example, would amount to only $525 ($3,500 x 15%).

The dependent and child care tax credit ranges from 20 percent to 35 percent of expenses for the first $3,000 in care for a child up to age 13 or an older child who is physically or mentally challenged. This can result in a tax savings of $600 to as much as $1,050 for someone with a very low income.

The $1,000 child credit is available to taxpayers with a child under age 17. Income restrictions apply to each.

“Raising children is expensive. But it’s significantly more costly if you are not aware of or taking advantage of the tax breaks for which you may be eligible,” said Bergstein.

Higher education tax breaks

The survey found that people overwhelmingly leaned toward the education deduction over the credits as offering the most tax savings. Specifically, two in five respondents (41 percent) said a deduction for higher education will save a qualifying taxpayer the most compared to only 16 percent choosing the Hope Credit and 14 percent the Lifetime Learning Credit as the bigger tax breaks. The remaining 29 percent said they did not know.

However, the Lifetime Learning Credit or the Hope Credit would likely offer a qualifying taxpayer a bigger tax break than the higher education deduction. The Lifetime Learning Credit is $2,000 per return based on expenses for post-secondary education and the Hope Credit is up to $1,800 per student based on expenses in the first two years of post-secondary undergraduate education. The deduction for higher education is up to $4,000 for qualifying taxpayers. Income restrictions apply to both the deduction and credits.

As a result, if a taxpayer in the 15 percent tax bracket, for example, takes a $4,000 tuition and fees deduction, it would be a $600 savings. In comparison a Lifetime Learning Credit of only $2,000 would reduce a qualifying taxpayer’s tax bill by the full $2,000. The benefit of a credit is a dollar-for-dollar offset rather than the percentage reduction in tax that a deduction provides.

“Tax rules also change so it’s important to keep current. For example, for 2009 and 2010, the Hope Credit is being renamed to American Opportunity Tax Credit; the credit amount is increasing and the coverage expanding,” said Bergstein. “So, it’s important to stay current so that you can maximize your tax savings.”

Retirement tax breaks

Several tax breaks also exist for saving for retirement. Taxpayers were not quizzed on which was the most beneficial, but on whether they plan to contribute to tax-advantaged retirement accounts in 2009. Slightly more than one-half of respondents (51 percent) indicate they will be making contributions; an additional 27 percent of eligible taxpayers will not be contributing at all and 18 percent are not contributing as they’ve already retired; the remainder are not sure of how much, if at all, they will be contributing.

Those planning to contribute include 30 percent who will be contributing about the same amount they did last year, 13 percent who will be contributing more and 8 percent who plan to contribute less than in 2008, the survey found.

“Many people have immediate demands on their finances given the economy, but they should also try to save as much as they can for retirement. Using the available tax benefits offered for IRAs, 401ks and other retirement accounts means more money being set aside for retirement and less being paid in taxes,” said Bergstein.

Refunds Are a Penalty, Not Reward

Finally, taxpayers were asked whether or not they believed it is better to receive a refund or to owe taxes on April 15. Only 7 percent answered correctly that it is better to owe some money, according to the CCH CompleteTax survey.

“Taxpayers still have the misperception that a tax refund is new-found money. It’s not. It’s your money. During the time you’ve left it with the IRS, you have not had it available for your use and you’ve earned no interest on it,” said Bergstein.

For example, rather than receiving a $1,000 refund, had the $1,000 been put in a savings account, even at very low interest rates, a taxpayer could reasonably earn an additional $30 in interest over a year. That may not seem like a lot but even that will cover the cost of using tax software to help prepare and e-file their tax return.

About the Survey Methodology

The nationwide telephone survey was conducted by GfK Roper on behalf of CCH CompleteTax from February 13-25, 2009, among 1,004 adults (age 18 and over). The margin of error on weighted data is +/- 3 percentage points.

About CCH CompleteTax

CCH CompleteTax, an online tax preparation and e-filing service for the do-it-yourself taxpayer, continues to set the standard when it comes to making online tax prep and e-filing easy, efficient and affordable. CCH CompleteTax offers comprehensive support to help taxpayers through each step of preparing and e-filing both federal and state income tax returns.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® TeamMate, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal, and regulatory sectors. Wolters Kluwer had 2008 annual revenues of €3.4 billion, employs approximately 20,000 people worldwide, and maintains operations in over 35 countries across Europe, North America, Asia Pacific, and Latin America. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Visit www.wolterskluwer.com for information about our market positions, customers, brands, and organization.

-- ### --

nb-09-64