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Steps you can take to reduce your 2013 taxes

5:24 AM, Jan 18, 2013   |    comments
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The Big Book of Ways to cut your 2012 Taxes in 2013 is out. Let's see what's inside!

Chapter 1: Contribute to a taxable IRA, if you can.

Chapter 2: Give money from your IRA to charity.

Chapters 3 through 27: We got nothing.

If you're looking for ways to cut your 2012 tax bill - ones that don't involve convincing the IRS that you have a son named Rover - you're pretty much out of luck. But if you want to avoid being in this position next year, take some steps now to reduce your 2013 taxes.

When the clock struck midnight on Dec. 31, most of your opportunities to reduce your 2012 taxes vanished like champagne bubbles. By the time your W-2 and 1099s roll in, you don't have much room to argue about what year you received income, interest or gains. You have two options to reduce 2012 taxes now.

The first: You can get an IRA deduction for 2012 if you make your contribution by April 15. If you and your spouse do not have a retirement plan at work, you can deduct your contribution - $5,000 per person, or $6,000 if you're 50 or older - from your income.

Things get more complicated if you or your spouse have a retirement plan at work.

• If you're filing jointly and your spouse has a retirement plan, you can make the full contribution if your modified adjusted gross income is $173,000 or less.

• If you both have a retirement plan at work and you're filing jointly, you need to have modified adjusted gross income less than $92,000 to take the full deduction; singles need modified adjusted gross income of less than $58,000.

The second: If you're at least 70½ and you act by Jan. 31, you can donate up to $100,000 of 2012 IRA distributions to charity, which will let you sidestep any taxes on the distribution. It's a decent deal for people who have enough retirement income and want to reduce their taxable income while doing some good.

That's it. Yes, you should make sure that you're taking the deductions you're entitled to for 2012, but there aren't any new lucrative deductions, such as one for purchasing snazzy new ties or investing in perpetual motion machines. Instead, it's time to focus on reducing the taxes you pay this year.

First, don't fall for the canard that earning more income isn't worth your time because you'll push yourself into a higher tax bracket. Let's say you're a single taxpayer, and your projected 2013 taxable income is $183,250. By the kind of coincidence that occurs only in the happy world of tax examples, that's precisely on the border of the 33% tax bracket and the 35% tax bracket. You're in the 33% bracket.

Should someone throw you another $1,000 of taxable income, however, you won't owe 35% on the entire $184,250. The U.S. has a graduated tax system: You'd owe 10% on the first $8,925 of income, 15% on the amount between $8,925 and $36,250, and so on. You would owe 35% on that pesky $1,000 extra income, however, vs. 33% in 2012, an increase of $20. You'd still have $650 after federal income taxes.

All things being equal, however, it's better to keep what income you can. With that in mind, here are a few things you can try if you want to reduce your 2013 taxes:

• Bump up your 401(k) contribution. Money you sock away into a 401(k) reduces your taxable income and, therefore, your taxes. You'd be surprised how little contributing 1% more of your income will affect your budget. Let's say you make $80,000 a year and get paid weekly. You already contribute 5% of your salary to a 401(k), and you're in the 25% tax bracket. Your pre-tax contribution is $77, which reduces your pay by $58, according to Fidelity Investment's take-home pay calculator. Bump up your contribution to 6%, and you'll be adding $92 a week pre-tax - $15 more - but your take-home pay will fall by only $11.

• Switch to dividends. Dividend-paying stocks will yield more than bank CDs and money market funds, and will be taxed at a lower rate, says Adam Baruch, CPA, partner at Melzer & Associates in New York City. The tax rate on dividends is 15% for most people, and 20% for single filers with $400,000 or more of taxable income. For couples, the limit is $450,000. Singles who make more than $200,000 in taxable income have to tack on another 3.8% tax for the Affordable Care Act; for couples, the threshold is $250,000.

Interest income is taxed at your ordinary income tax rate. If you're not comfortable with the risks of stocks, however, you'll have to settle for the low rates and high taxes on CDs.

• Switch to munis. If you own a bond fund outside a retirement account, consider moving to municipal bonds. Interest from munis is free from federal income taxes, and if they are issued by the state you live in, they're free from state taxes as well. Currently, a 10-year, high-quality muni bond yields 1.7%, vs. 1.83% for a 10-year Treasury note. But you'll keep more after taxes with the muni. To get a 1.7% yield after taxes, a person in the 25% bracket would have to earn 2.3% in a fully taxable investment.

• Sell your losers. Did you buy Apple this fall in a moment of enthusiasm? If it's in a taxable account, sell the stock and take your loss. Let's say you bought 100 shares of Apple at $600 a share, for a total of $6,000. Had you sold it at $500 a share, you'd have lost $1,000, or 16.7%. You can use that loss to offset $1,000 of capital gains. If you have no gains, you can deduct the loss from your income.

If you feel that Apple still has potential, you can buy back the stock after 30 days. If you don't wait, your loss will be disallowed.

No one likes higher taxes. The tax hike most likely to hit you hardest - the 2 percentage point increase in payroll taxes - is entirely impossible to dodge. But if you start trying to reduce taxes now, you won't be forging birth certificates for quintuplets next year.

By John Waggoner

USA Today

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