If you're a millionaire, lowering your taxes can be complicated, involving shelters in the Cayman Islands, Swiss bank accounts, fancy trusts, and other strategies -- some of which are only arguably legal. But for the rest of us who are not near the top tax brackets, minimizing payments to Uncle Sam can be simpler.
Here are some tips to help you lower your tax bill. Note that some of them require you to act before 2013.
9 Year-End Tax Tips for Non-Millionaires
While a tax deduction lets you reduce your taxable income, saving you some money, a tax credit reduces your tax hit dollar-for-dollar. Take some time to learn about various available credits and deductions, and you may suddenly find yourself paying thousands less in taxes. For instance, if you have children, dependents, or education-related expenses, or have been hit with a costly natural-disaster loss, there are credits and deductions out there that you may be able to take to reduce your tax bill.
If you're 70 1/2 years old or older and you have a traditional IRA, you need to take your required minimum withdrawals annually. Failing to do so can force you to pay big penalties: 50 percent of what you should have taken.
For 2012, the annual gift tax exclusion is $13,000 per donor and per recipient. You can give up to $13,000 to as many individuals as you like, tax-free. And if you're married, you and your spouse can give $26,000 per recipient. This exclusion rises to $14,000 for 2013, but if you don't make your gift by the end of the year, you lose the 2012 exclusion. Those interested in transferring a lot of money to their kids, for example, might want to max out contributions each year for a while.
If you tend to give a lot to charities and you've got some stocks in your portfolio that have grown nicely for you, consider giving appreciated stock to your favorite charities instead of cash. If you've held the stock for more than a year, you'll avoid paying tax on the appreciation, and you can still deduct the full value of the stock. Call your favorite nonprofits; the folks there will probably be able to help you with this. Even if you're just going to give cash, consider doing so before the end of the year so you can get the tax deduction on this year's tax return.
You should be able to do this even if you don't itemize your deductions, as long as you include your ex's Social Security number. The IRS needs it so that it can make sure that your ex has claimed the amount as taxable income.
Municipal bonds may not seem exciting, but the income they generate is generally free from federal taxes and from taxes in the issuing municipality. In contrast, income from corporate and Treasury bonds is taxed as ordinary income, at rates that can be relatively steep. Municipal bonds do typically offer lower yields, but lately, the rates have been comparable to Treasuries of similar maturities despite offering tax-free income. Some municipal bonds aren't as safe as Treasury bonds, but top-rated ones are close. If you're interested, consider municipal-bond mutual funds. Also, pay attention to current tax wranglings in Washington, as the tax-exempt feature of municipal bonds may actually end up reduced or removed.
It can be tax-smart to time some of your financial events strategically. For example, if you have a mortgage and you pay your January bill early, by Dec. 31, you may be able to deduct the interest in your 2012 return. (If you pay your property taxes and state or local taxes before year-end, you should be able to deduct them, too.) Note, though, that some mortgage lenders won't cooperate and may apply your extra payment toward principal and not interest, or may just not include the extra payment on your year-end tax statement. Check with them first.
Similarly, if you're expecting a sizable bonus at work soon, you might ask your employer to pay it to you in January, in order to lower your taxable income for 2012. If you earn your income by billing people for your work and collecting payment, you could also delay sending out some bills until January, in order to reduce your 2012 income. Pay state estimated taxes each quarter? Send in your January payment in December, and you should be able to deduct them this year -- assuming you can itemize your deductions and you're not subject to the Alternative Minimum Tax, or AMT. Above all, consider your tax rate and whether you expect it to be much higher or lower next year -- then shift whatever income and expenses you can accordingly, to minimize your tax hit.
To make sure you're building a better retirement for yourself, be sure to take advantage of IRAs. Contribution limits for 2012 are $5,000 per year for a traditional or Roth IRA, but those 50 and older can contribute $6,000. You can actually make your 2012 contribution any time up to April 15, 2013, but the earlier you do, the sooner those dollars will start working for you. If you have the money available, you might also want to make your contribution for 2013 closer to the beginning of the year than the end. Limits for 2013 IRA contributions rise to $5,500 for most of us and to $6,500 for those 50 or older.