Higher Earners Are Twice as Likely to Know the Top Tax Rate Than Lower Earners

Throughout the United States, millions of people must file tax returns each year. Taxes are also taken out of worker paychecks throughout the year, and when tax filing season rolls around, workers have to file tax returns to either get a refund if they overpaid or pay any remaining taxes due.

Despite the fact that taxes affect just about everyone, some people know a lot more about how they work than others do. Specifically, new research from the Tax Foundation revealed that lower-income taxpayers were far less likely to understand details about the tax code compared to higher earners.

This can be a problem, because a lack of understanding about how taxes work can lead to overpayments and missed opportunities when it comes to your finances. 

Higher earners have a better understanding of tax rules

The Tax Foundation asked Americans questions to understand their knowledge of the U.S. tax code. The research revealed that more than two-thirds of people taking the survey didn’t know what the top federal tax rate was.  Unsurprisingly, higher earners were much more likely to have his knowledge. In fact, higher earners were twice as likely as lower earners to know the top rate. 

While higher earners are more likely to be subject to the highest tax rates, and are more likely to pay attention to tax rules because they face bigger IRS bills, the sad reality is that many lower-earners are lacking even basic knowledge of how the tax code works. For example, over half of survey respondents didn’t really understand how tax brackets work at all, 48% didn’t know a tax refund wasn’t a good thing, and 65% of survey respondents described the tax code as overly complex. 

What can be done to close the knowledge gap?

Ultimately, the best way to fix the confusion about the tax code would be to simplify it. IRS rules are incredibly confusing, with different deductions, credits, tax rates, and types of taxes collected.

Many people would prefer the tax code to be overhauled and to become simpler, and there is certainly an argument to be made that this should happen given the fact that Americans are forced to spend 6.5 billion hours on tax prep, according to the National Taxpayers Union Foundation. 

Unfortunately, overhauling the tax code would be a major political lift, and it may not be a very successful one. Every lobbyist group is going to try to argue that their favored deductions shouldn’t go anywhere, and politicians are very unlikely to agree on a way forward that everyone could get behind. 

If reforms can’t happen, it’s clear Americans need more help. Education about taxes should be a required part of the school curriculum since everyone has to file and pay taxes. Nonprofit and community groups should also explore ways to provide more tax education to help people better understand how the tax code affects their finances.

For those who are currently facing questions about their taxes, it’s also worth noting that there are some free services that help seniors and those with limited incomes to ensure they are filing correctly. The IRS has information on these programs, including the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs.

By taking the time to understand more about the tax code, every American can make better choices about how much to have withheld from their checks, what deductions and credits to claim when filing, and what pressure they want to put on their representatives to make changes to a system that’s costing everyone a lot of time and money.  

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