Understanding tax exemptions, deductions and credits
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Our tax experts are answering Yahoo Finance viewer questions as we hit the homestretch of tax season. Sheila Brandenberg, a New York-based CPA, has some answers for filers who find a lot of the process confusing.
I put the wrong number of exemptions on my W-4. How do I fix this?
Figuring out the exemptions to take on your W-4 can be confusing -- especially since you fill it out at a time when you’re probably not thinking about your taxes.
“The W-4 is the paper you file when you start a new job or you want to change your current exemptions,” Brandenberg says. “You mark down your filing status and the number of exemptions you would like to claim throughout the year. You don't have to worry, though, because it all evens out when you file your tax return.”
Claiming the wrong number of exemptions can lead to one of two outcomes: owing more to the IRS or getting a bigger refund. If you have a large refund, you may want to increase the number of exemptions so that you’re getting more money throughout the year and not just sending it off to the government. More exemptions means less taken out for taxes in each paycheck. Conversely, if you end up owing more tax, it might be a good idea to reduce the number of exemptions you’re claiming.
“When you get to your tax return, if you find that you have a significantly larger refund than you expected or you owe a lot of money, then you want to go back to your W-4 and fix that,” Brandeberg says. “That's something that can always be updated.”
If your results surprise you, it’s easy to address for future filings. To update your W-4, contact your employer’s human resources department.
What is the difference between a deduction and a credit?
There continues to be a lot of confusion among filers over the difference between deductions and credits, but Brandenberg has a simple breakdown to help keep them straight.
A tax deduction lowers your taxable income, which therefore lowers the amount of taxes you owe. “And then a credit is something that reduces your actual taxes dollar-for-dollar,” she says. A deduction, like a donation to a charity or interest paid on a student loan, represents an amount of your income the government doesn’t consider taxable, whereas a credit -- like the earned income tax credit -- directly reduces the amount of tax you pay.
“So if you're thinking about whether it’s better to have a credit or a deduction, credits are definitely better,” Brandenberg says.
If you have tax questions, send them to us at moneyquestions@yahoo.com.
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