Maybe we need tax education as well as tax reform. No matter how simple the Tax Code becomes, it might not be simple enough.  

As taxpayers filed their tax returns last month, nearly 70 percent of them used at-home software, according to an Ernst & Young poll. And close to a third didn’t know the difference between a tax deduction and a tax credit, said Thomas DiLorenzo, a manager in the Employee Financial Services group at Ernst & Young LLP.

The information was gleaned from a poll on an Ernst & Young financial planning Web site for corporate clients that subscribe to the service for their employees. “It helps the employees understand how their finances work,” said DiLorenzo. “It covers a pretty good cross-section of the taxpaying public, dealing with everyone from entry-level employees to managers to executives.”

This leads to the conclusion that a large percentage of persons doing taxes on their own don’t understand the process and are missing one of the more straightforward aspects of the system, according to DiLorenzo.

“A lot of people file their return as if they’re rolling dice. They’re not sure if they will get a refund. They just plug in the numbers and hope the result is good,” he said. “We see this as a planning opportunity for next year’s return. By doing projections from their 2011 return, we can do a Form W-4 calculation. We can show them what they have to do to allow them to have more use of their money during the year, or to have more taken out so they won’t get caught with a big tax bill next filing season.”

Most people fill out their Form W-4 when they’re first hired, and then forget about it, noted DiLorenzo. “They ask a coworker or their parents, and never look at the form again. But life goes on, and their situation can change. They get married, have children, buy a house, and all of those things could have an impact on their tax situation.”

I would like to think that the one-third of people that don’t know the difference between a deduction and a credit are an anomaly, but my guess is that the figure is accurate. It doesn’t bode well for tax reform if the general population fails to grasp such an elementary principle.  No matter how much the code is simplified (outside of a truly flat tax), it seems there will always be some tax concepts that the average person just doesn’t get.

That’s why, for the half of the population that pays income tax, an elementary education seems to be in order. Perhaps schools can make it a part of their curriculum to teach high school civics classes a bit of tax literacy: let’s start with the definition of gross income, adjusted gross income, and taxable income, and go on to the difference between a deduction and a credit.

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