20 smart ideas to reduce your taxes.

Author:Carey, Patricia M.

If you're like most taxpayers, you're juggling an increasingly complex set of financial goals. You're saving for a home, college tuition, retirement, maybe paying more toward your health care costs. And every dollar swallowed up by taxes kicks you a dollar back from achieving your dream.

While the 1986 Tax Reform closed the door on certain tax breaks, financial experts say you can still reduce your tax bill with careful planning.

"The earlier you can address your taxes, the more you can analyze where you come out with different strategies," says John H. Howell, a partner at Ernst & Young in New York, "It takes pressure off if you have all the information."

The key to an effective tax strategy is lowering Adjusted Gross Income (AGI), the figure the IRS uses to calculate your tax bill. (For more information on calculating your AGI, see "Tax Tips for Peace of Mind," March 1991.) The same figure is used to calculate thresholds for some itemized deductions, such as medical expenses and miscellaneous deductions. Most state income taxes are also based on the AGI.

For maximum savings, work with your financial adviser on a tax strategy that complements your financial goals. If you hear about a deduction that seems relevant to your situation, discuss it with your tax preparer or financial adviser. "Don't just drop off the paperwork," says Lionel G. Henderson, of Lionel Henderson & Associates, a CPA firm in Washington, D.C. "Take time to talk with your preparer. Ask specific questions."

For starters, see how many of these tax-trimming tips apply to your tax return:

  1. Defer income. As a general rule, taxpayers are advised to defer as much income as possible to the next year. Because money has a time value, you come out ahead by paying taxes later.

    One way is to defer your year-end bonus until early next year. Keep in mind, though, that the law requires you to arrange this with your employer before you earn the bonus. Self-employed taxpayers, such as physicians and lawyers, can defer income by delaying some billings. Landlords can put off collecting rents due at the end of the year. Don't get carried away, though, cautions Kevin M. Coleman, a CPA with Coleman & Coleman of Culver City, Calif. Make sure your cash flow is healthy enough to absorb those late payments.

    Deferring income makes sense if you expect to be in the same or lower tax bracket in 1993. This year, the forthcoming presidential election adds an element of uncertainty, notes Coleman. If you expect the winner to hike tax rates in 1993, you may want to recognize as much income as possible this year.

  2. Accelerate deductible payments. This is the mirror image of the income-deferring rule. By prepaying expenses normally due in early 1993, you benefit from the deduction a year early. Expenses such as outstanding property taxes and state and local income taxes are deductible when paid--even if they are not due until early next year.

    Use a charge card for deductible expenses, including contributions to charity. You can deduct the expense this year even if you don't pay the bill until next year.

    For many consumers, the biggest jolt of tax reform was the phasing out of the deduction for personal interest, including interest on student loans, car loans and credit card purchases. If you're still carrying large credit card balances at inflated interest rates, now is the time to pay them off.

    Acceleration is particularly useful for self-employed taxpayers. "The business owner has more control over the period of recognition of expenses," says Louis G. Hutt Jr., a managing partner at Bennett Hutt & Co., a CPA firm in Columbia, Md. He suggests prepaying some portion of advertising, insurance, supplies and utilities to defer payment of selfemployment and income taxes. Prepaying expenses maximizes the tax savings in the current year while pushing payment of the bills until the next year.

    The IRS does not specify how far in advance you may prepay, but don't push the limits. "You can't make payments purely for tax avoidance," cautions Hutt. "I generally recommend paying only 30-45 days in advance."

    lf you expect to be in a...

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