What You Don’t Know About Taxes Can Hurt You

This article appeared in SoFi's On the Money newsletter. Not getting it? Sign up here.

It’s that time of year when we grab the Advil, wring our hands, and mutter to ourselves: Why are taxes so freaking confusing?

The U.S. tax code is notoriously complex (it’s an estimated 4 million words long.) So it’s no wonder the majority of Americans don’t understand many of the basics, according to Erin Collins, the National Taxpayer Advocate and head of an independent IRS office that represents taxpayers.

In fact, our lack of so-called “tax literacy” is now among the top problems facing U.S. taxpayers — right up there with return processing delays and the growing sophistication of tax-related scams, she told Congress in her annual report last month.

Errors on income tax returns cost the government billions every year. But mistakes cost taxpayers too, according to Collins. More than half of small business owners don’t know there’s a 20% deduction on qualified business income, for example. And roughly 20% of eligible lower-income taxpayers fail to claim the Earned Income Tax Credit.

Here are four other key things many people don’t know:

•   When tax returns are due: 45% of Generation Z and 36% of Millennials aren’t sure when they have to file their taxes, according to a Cash App survey cited by Collins. (Mark your calendar: The deadline is April 15.)

•   An extension for filing is not an extension for paying. Yes, you can file your taxes after April 15 if you file for an extension, but if you owe the IRS money, it’s still due by April 15. And if it’s late, you may have to pay interest and penalties. (An online tax calculator can help you estimate what you owe.)

•   There’s a difference between a tax deduction and a tax credit. Do you know whether a $1,000 tax deduction or a $1,000 tax credit is more valuable, assuming you pay 10% tax on $10,000 of income? It’s the tax credit, which directly lowers your tax bill. (A $1,000 tax deduction would lower your taxable income to $9,000, so you’d pay $900 rather than $1,000 in tax.)

•   Getting a refund isn’t necessarily a good thing. A refund means too much of your paycheck was diverted to the IRS, so you’ve basically given the government an interest-free loan. That extra money could have been used to pay down debt or invest in your retirement savings.

So what? The average taxpayer spends 13 hours filing a 1040 return and, still, mistakes are common. Improving your financial literacy will not only help you during tax time but will make it easier to navigate through other milestones like saving for retirement, buying a house, or starting a business. Don’t bury your head in the sand. It’s worth investing some time to understand the basics — even if it makes you a little crazy.

Related Reading

•   8 Tax Services That Can Help You File for Free This Year (CNET)

•   What’s New This Tax Season That Can Save You Money (The Wall Street Journal via MSN)

•   Beginner’s Guide on How to File Taxes (SoFi)

Image Credit: Doublediamondphoto/iStock

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

OTM20250226SW