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CCH CompleteTax Survey Suggests Taxpayers Confused by Tax Code Complexity

Basic Tax Rules May Baffle Taxpayers When Completing Income Tax Return   

(RIVERWOODS, ILL., March 16, 2005) – When it comes to knowing basic tax rules or the tax consequences of various situations, many taxpayers would not receive a passing grade this year, according to the findings of a nationwide CCH CompleteTax survey. In fact, the survey found that more than two-thirds of respondents overall answered survey questions incorrectly when asked about issues that may arise in the course of doing their taxes this year. CompleteTax® (www.completetax.com) developed by CCH Tax and Accounting (CCH), the nation’s premiere provider of tax and accounting productivity software and services and a Wolters Kluwer company, is an online tax preparation and e-filing service for individual taxpayers. The survey reflects responses of more than 2,200 U.S. adult taxpayers who filed a federal tax return in the past two years.

“It’s no surprise that taxes are complex. But with just a month left in the tax season, the survey findings do draw attention to how much support taxpayers may need to complete their returns correctly,” said Ernest Zoumot, director of software product management for CCH Tax and Accounting. “Anyone who is still considering pen and paper may want to reconsider, as good tax software will readily enable taxpayers to correctly answer questions as they arise, helping them to accurately complete their taxes and maximize their returns.”

The survey, which was commissioned by CCH CompleteTax and conducted by Harris Interactive ®, asked a series of multiple-choice questions related to basic tax issues the average taxpayer is confronted with, from selling a home to investing and saving for their retirement or a child’s education. Among the findings:

  • Gains on sale of home. Rules on capital gains related to the sale of a home eluded most taxpayers. In fact, only 16 percent of U.S. adult taxpayers were able to correctly identify that you must live in your home two of the last five years in order to qualify for the capital gains exclusion when you sell your home. Taxpayers age 55 and older were more likely than those under the age 55 to answer correctly; still, only 24 percent in this age group identified the correct answer, vs. 12 percent of those under age 55.
  • Claiming a dependent. Only 19 percent of taxpayers correctly answered whether or not a dependent who had unearned income of $700 during 2004 would have to file a return. The correct answer is that they would not have to file a return and that their guardian could claim them as a dependent on their tax return; although a child should file if they had any withholding taxes taken out of their salary in order to get a refund. Taxpayers with children under age 18 in their home were more likely to respond accurately; still, only 25 percent of these individuals did so, vs. 16 percent of those without children under age 18 in their home.
  • Education savings. The vast majority of taxpayers also were unable to correctly identify three main federally recognized education savings programs – Hope credit, Coverdell IRA and 529 plans. When a fourth, contrived name was added to the list – “Allendale education fund” – and taxpayers were asked to identify which was not a federally recognized education savings program – only 4 percent identified “Allendale” as a non-federal program. A surprising 77 percent of taxpayers with children between the ages of 13 and 17 were uncertain of the correct answer. Also, the CCH CompleteTax survey found only 3 percent of taxpayers with household incomes under $75,000 answered correctly (vs. 8 percent of taxpayers with household incomes of $75,000 or more), suggesting that those who may most need the programs are the least likely to be aware of them.
  • Capital gains. Carryover rules for investment gains and losses also appear to confuse taxpayers. In fact, 21 percent of taxpayers incorrectly believe that gains can be carried over to offset losses, while only 9 percent were able to correctly identify that investors cannot carryover gains to offset loses. The remainder either did not know the correct answer or chose an incorrect response from the multiple choice list. The higher the income, the more confusion there seems to be, with 30 percent of taxpayers with household incomes of $75,000 or more under the incorrect assumption that gains can be carried over for some period of time.
  • Alternative Minimum Tax. Pinpointing exactly what the AMT is also challenged survey participants. In fact, only 8 percent of taxpayers were able to correctly identify that the AMT provides a formula for computing tax that ignores certain tax treatment and deductions a taxpayer would otherwise be entitled to claim, while 75 percent of taxpayers were uncertain of the AMT definition and the remainder chose an incorrect response from the multiple choice list.
  • Retirement savings. Tax consequences of retirement savings also are largely unknown, with the survey finding only 27 percent of taxpayers able to correctly identify that distributions from Roth IRAs are tax free. Among higher income earners (taxpayers with household incomes of $75,000 or more), 39 percent answered correctly and, among those 55 years of age or older, 31 percent answered correctly. However, 23 percent of taxpayers overall also indicated that 401(k) distributions are tax free and 16 percent believe IRA distributions are tax free; this could mean an unpleasant surprise awaits them when they begin to take distributions and find they owe taxes they had not expected.

According to IRS statistics, a record number of individual self-filing taxpayers – 8.7 million – had already e-filed their federal income tax returns as of the end of February, indicating that more taxpayers are recognizing the importance of seeking support.

For those still evaluating software options, or looking for a new option for next year, CCH’s Zoumot recommends that taxpayers consider the program’s:

  • ease of use;
  • resources such as expertise and thoroughness of page-specific help;
  • inclusion of a comprehensive tax guide and frequently asked questions to address a variety of tax issues; and
  • fact-checking capabilities.

About the Survey Methodology

Harris Interactive fielded the CCH CompleteTax study online from February 18-22, 2005, interviewing a nationwide sample of 2,518 U.S. adults aged 18 and over, of whom 2,244 filed a federal tax return within the past two years (referred to as “taxpayers” in this release). Data were weighted to be representative of the total U.S. adult population on the basis of region, age within gender, education, household income, race/ethnicity, and propensity to be online. The sampling error for the overall sample result is plus or minus 3 percentage points. Sampling error for the various sub-sample results is higher and varies. This online sample was not a probability sample.

About Harris Interactive

Harris Interactive Inc. (www.harrisinteractive.com), the 15th largest and fastest-growing market research firm in the world, is a Rochester, N.Y.-based global research company that blends premier strategic consulting with innovative and efficient methods of investigation, analysis and application. Known for The Harris Poll® and for pioneering Internet-based research methods, Harris Interactive conducts proprietary and public research to help its clients achieve clear, material and enduring results.

Harris Interactive combines its intellectual capital, databases and technology to advance market leadership through U.S. offices and wholly owned subsidiaries: London-based HI Europe (www.hieurope.com), Paris-based Novatris (www.novatris.com), Tokyo-based Harris Interactive Japan, through newly acquired WirthlinWorldwide, a Reston, Virginia-based research and consultancy firm ranked 25th largest in the world, and through an independent global network of affiliate market research companies. EOE M/F/D/V

About CCH Tax and Accounting

CCH Tax and Accounting (tax.cchgroup.com), based in Riverwoods, Ill., is a leading provider of tax and accounting information, software and services. CCH has served tax, accounting and business professionals and their clients since 1913, providing them with the most authoritative, timely and comprehensive tax resources. CCH is a Wolters Kluwer company (www.wolterskluwer.com). Wolters Kluwer is a leading multinational publisher and information services company.

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