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March 09, 2012


Taxpayers can take steps now to reduce their 2012 income tax obligations

Story & photo by Rob Schuette, Public Affairs Staff

Taxpayers who want to reduce the amounts they will owe or refunds they will receive from their 2012 income tax returns can take steps now to help achieve their goals.
PHOTO: Rita Byers (right) of the Fort McCoy Volunteer Income Tax Center helps Alan and Peggy Woodworth complete their 2011 income tax returns. Photo by Rob Schuette
Rita Byers (right) of the Fort McCoy Volunteer Income Tax Center helps Alan and Peggy Woodworth complete their 2011 income tax returns. (Photo by Rob Schuette)

One of the best places to start is to analyze 2011 income tax returns, said Jim Markgraf and Rita Byers of the Fort McCoy Volunteer Income Tax Assistance center.

“We often get clients who ask us how to get closer to nearly matching their withholdings versus their total tax obligations,” Markgraf said. “Some people ask the question because they owe money every year. Others ask simply because their refund is so high they would prefer to receive more of their wages during the year.”

Federal and military personnel can manage and/or change the amount of federal and state income tax they have withheld by going to the MyPay website at https://mypay.dfas.mil/mypay.aspx, and clicking on federal or state withholding. The amounts can be adjusted online by accessing the W-4 federal forms or state tax withholding forms and making the desired changes.

Withholding rate estimations can be calculated using the Internal Revenue Service (IRS) site at http://www.irs.gov/newsroom/article/0,,id=225793,00.html.

Bryan Clarkin, Fort McCoy Army Community Service (ACS) financial readiness program manager, said federal personnel can take steps immediately to control the amount of income tax they ultimately will owe for 2012.

Some of the tools available to federal employees and some contractors to help lower their tax bills include investing in tax-deferred Thrift Savings Plan (TSP) or 401(k) plans and several tax exempt medical or health care accounts.

Employees who open or increase their contributions to the TSP or their 401(k) can reduce the amount of taxable income — “thereby decreasing the amount of taxes you might owe on your earned income, while also building up your retirement account,” Clarkin said.

“Retirement plans like TSP, 401(k) and Individual Retirement Accounts (IRAs) also have catch-up provisions where if you’re older than 50 you can contribute additional amounts more than the maximums established for taxpayers.”

For example, federal employees younger than age 50 can contribute up to $17,000 a year into a TSP account in 2012. Clarkin said those older than 50 can contribute an additional $5,500 for 2012, making a total of up to $22,500 exempt from federal and/or state taxes. Participants must pay taxes on the money when they withdraw it.

Lower-income taxpayers, for example, married couples whose adjustable gross income is less than $57,500, can benefit from the IRS Retirement Savings Contribution Credit.

The amount of the credit is determined by adjusted gross income (AGI) and an eligible contribution to an IRA, a 401(k) or the TSP.

The credit is determined on a sliding scale. Clarkin said the minimum amount for those eligible is $400 ($200 per individual) if their AGI is less than $57,500. The maximum amount of the credit is up to $2,000 ($1,000 per individual) if their AGI is $34,500 or less.

Clarkin said the taxpayers must meet the AGI criteria for contributing to an IRA, a 401(k), or the TSP account. The credit is a percentage of the qualifying contribution amount to an IRA, 401(k) or TSP, with the highest rate for taxpayers with the least income.

Federal employees also can create a flexible (medical) spending account (FSA) and a high-deductible health savings account (HSA), he said.

Contributions can reach a maximum of $5,000 per year per individual for health care FSA accounts, for child care and dependent care the limit is $5,000 per household which is in pre-tax money. The disadvantage is the money must be spent in that benefit year or it’s lost.

Clarkin said employees who choose a High Deductible Health Care plan and put their contribution into an HSA can help reduce their taxes and save money for medical expenses or for retirement. The maximum contribution for an individual coverage plan is up to $3,100 and up to $6,250 for Family coverage of pre-tax money. The advantage of this account is if the money isn’t spent it can accumulate and roll over to the next year indefinitely, he said.

Additionally, Clarkin stated the money withdrawn and spent on medical needs is non-taxable. Participants who do not use or need to spend money on health care can invest the balance of their money on investments from money markets accounts, bonds, mutual funds, stocks to investing with brokers depending upon their health care plan, much like that of an IRA account.

“If at your full retirement age you have a remaining balance in your HSA account you can withdraw the money from the HSA account without penalty,” he said. “All money withdrawn would be taxed as ordinary income.”

Clarkin noted HSA accounts are not for everyone, and anyone considering these accounts should talk to their insurance company, health care provider and even their financial planner before deciding to open an account.

Many other contribution or interest credit programs are available to federal and public employees to help them reduce taxes. These include child care, home mortgage interest, educational contributions and charitable donations or contributions.

Clarkin said some limits may be placed on programs, such as the educational contributions into a 529 or Coverdale accounts.
This money grows tax deferred, but must be spent on education expenses to remain nontaxable, he added.

In the financial readiness program, Clarkin said he can meet with all Department of Defense-related Soldiers, civilians, contractors and Family members to provide assistance in helping them navigate their financial benefits and choices.

Generally the assistance entails explaining the advantages and disadvantages of different types of financial investments or actions.

If requested, Clarkin also can provide information about prospective commercial firms that handle a specific type of financial transaction.

Other monetary matters Clarkin has information about include budgeting concerns or issues, credit card and other debt, saving strategies, etc.

For more information, call ACS at 608-388-6812/3505.

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