All it took was a quick glance at the young woman’s federal tax return form for Certified Financial Planner™ Austin Lewis to spot an important omission — one that could net the college student a valuable $2,500 American Opportunity Tax Credit from Uncle Sam – and avoid a costly tax pitfall.
Fortunately this young woman consulted Lewis before filing her tax return, preventing her from succumbing to one of the many common and potentially costly pitfalls that can trip up taxpayers. With the tax deadline fast approaching, here’s a look at some of those pitfalls and how to avoid them:
Trouble can arise when the information on a W-4 causes either too much or too little to be withheld by claiming not enough or too many allowances. The latter situation can be particularly sticky, says Lewis. “If you under-withhold, chances are you are going to owe more taxes than you expect.” And in the case of withholding too much, while that probably means you have a better chance of getting a tax refund, that’s money you could have used for more constructive purposes, like contributing to a retirement account, saving for college or paying down debt, he notes.
To avoid over- or under-withholding, check the W-4 form your employer has on file for you to verify the allowances accurately reflect your current situation. And when your situation changes — a salary increase, birth of a child, change in marital status, etc. — be sure your employer adjusts your allowances and withholding accordingly. For help figuring out what’s appropriate withholding, check out the IRS calculator at www.irs.gov/Individuals/IRS-Withholding-Calculator
This column is provided by the Financial Planning Association® (FPA®) of Northeastern New York, the principal professional organization for Certified Financial PlannerTM (CFP®) professionals. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Northeastern New York if you use this column in whole or in part.
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