You may not be a Mark Zuckerberg, but you may suddenly find yourself making a lot of money, and you realize that's going to cost you at tax time. Careful planning and preparation can help you cut that tax bill. You'll always pay more, though, because federal and most state income taxes are graduated, meaning folks who make more money pay taxes at higher rates.
Get Expert Help
Hire a good tax adviser or lawyer. That may seem obvious, but many people, especially younger ones, are slow to realize that top earners need top advice. Federal and state tax rules are complex and change frequently, so it takes an expert to keep up with the changes, make sure you take advantage of all opportunities and, most important, avoid penalties.
Use Your Deductions
Use all your deductions up to the limit. You can deduct your contributions to retirement plans, so contribute the maximum amount you can to your 401(k) plan. You can also deduct interest on real estate loans, expenses for educational tuition, some child care costs, gambling losses and a host of other items. Itemize every possible deduction, but be sure to keep detailed records because your deductions will be scrutinized.
You may be able to defer some income. In some cases, you can set some income aside until the future so you won't pay tax on it until you collect it. That can cut your immediate tax bill and preserve some income for the years when you are not receiving regular pay. Deferred income is different from contributions to 401(k) or similar retirement programs because it's money you don't get immediately.
Max Your Charity Donations
Give to charity. You can deduct contributions to qualified charities and nonprofit organizations. In most cases, you can give an almost unlimited amount of cash to qualified organizations and deduct that from your taxable income. You also can give property or other assets, but in some cases you'll be limited in amounts and will have to have gifts evaluated. You'll always need confirmation for the gift from the recipient.
Use Estate Options
Look at your estate. If your estate is valued at more than $1 million in 2012, consult an estate planner about ways to put funds into trusts or other options to reduce tax obligations. Creating your own foundation is another way to move income from your taxes to a tax-exempt area.