The new year offers individuals and families the opportunity to sit down and find ways to save money throughout the year as they consider their tax-planning strategies, according to one local financial planner.
"Meet with a financial professional," emphasized Sal DiCiaccio, an investment executive who also is president and founder of Research Financial Group. "That’s really important whether it’s the beginning of the year or the end of the year. … Two words I use are plan and strategize."
If an employee anticipates getting a raise, for example, that person may want to consider investing a percentage of the extra funds in a 401(k) or other retirement savings account, DiCiaccio added.
"They won’t notice it’s missing (from the paycheck)," especially since the funds are invested on a pre-tax basis, he said of earmarking for retirement a portion of a pay increase.
He also suggested focusing on donations and investments in the new year, adding that contribution limitations have been raised for 2012 for such retirement accounts as 401(k), 403(b) and 457 plans.
The IRS also has added a "catch-up provision" for retirement accounts held by employees older than 50, explained DiCiaccio, who serves on the board of directors for Catholic Courier/El Mensajero Católico. The maximum a person may contribute to a retirement plan, such as a 401(k), has been raised to $17,000 in 2012, and those who are older than 50 can save an additional $5,500 for that fund, he added.
"Typically people over the age of 50 are entering their prime earning years and have higher incomes and can afford to save more for retirement," DiCiaccio said.
In going through the tax-preparation process, Al Burgos, who operates Burgos Income Tax offices in Rochester, said his clients have discovered how to invest in Individual Retirement Accounts (IRAs) or the benefit of saving more money in their company’s 401(k) accounts.
"I really like to push entrepreneurship and real estate investing," Burgos said. "The government wants you to employ people and house people. That’s why you are going to get tax credits in those areas."
An individual also may want to consider giving "appreciated assets" — such as stocks or bonds that were purchased at a price that is lower than their current value — as a donation to a church or charity, he said. If that asset is donated, the person who purchased the stock or bond would not have to pay tax on the capital gain of the appreciated asset, DiCiaccio noted.
Burgos said his offices serve primarily middle- and low-income wage earners, and that the federal Earned Income Tax Credit — also known as the EITC — has the biggest impact on this demographic. The EITC is a refundable federal income tax credit for low- to moderate-income working individuals and families. According to information available at www.irs.gov/individuals/article/0,,id=96406,00.html, Congress originally approved the tax credit in 1975 to help offset the burden of Social Security taxes and to provide an incentive to work.
When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit by meeting certain requirements. Those who qualify, however, must file tax returns even if their lower income levels would not otherwise require them to file, the website indicates.
Burgos said that an individual with an adjusted gross income of $41,100 with one dependent would be eligible for a $3,094 refund, for example.
He added that the EITC has helped clients who are disabled, rural workers or self-employed, but that 25 percent of tax filers nationwide do not even realize they qualify for the credit. Burgos said his offices strive to make clients aware of this opportunity.
Federal tax credits also can be earned by low-income earners and college students who save money in retirement accounts, DiCiaccio noted.
As DiCiaccio does, Burgos said he encourages people to seek assistance from tax advisers. Although he recognizes that people may find it easier to file their own tax forms using standard deduction, Burgos said engaging a tax professional helps them accurately itemize all deductions to which they’re entitled. He explained, for example, that itemized deductions for mortgage interest can exceed the standard deduction for people who own businesses or homes.
Burgos has even created a booklet outlining the top 10 mistakes people make on their tax returns — many of which involve missing deductions, he said.