Tax Reduction Overview Part 1

PLAN DURING THE YEAR

Reducing your tax bill requires planning throughout the year. To help you identify opportunities you can use, we have included the general strategies that fit many people’s needs. Depending on your specific situation as well as your financial and other goals, other techniques may also be effective.

If you are like most people, you think about taxes once a year (or possibly once a quarter) when it is time to file a tax return. However, if that is your approach, you are probably paying more than you have to. Tax dollars that you might be able to avoid or postpone can be invested to increase your security and retirement income.

This became even more important with the Economic Growth and Tax Reconciliation Act of 2001, and subsequent tax acts that amended and accelerated these changes. In 2004, there were three major tax acts: The American Jobs Creation Act (AJCA), the Pension Funding Equity Act (PFEA) and the Working Families Tax Relief Act (WFTRA). 2005 saw the addition of the Katrina Emergency Tax Relief Act (KETRA) and the Gulf Opportunity Zone Act (GOZA). In May of 2006, the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005 was finally signed into law.

These were followed by the Tax Relief and Health Care Act (TRHCA) and the major, Pension Protection Act (PPA) of 2006.

OPPORTUNITIES STILL EXIST

Although the trend seems to be toward narrowing loopholes, there are still opportunities for most people to significantly reduce their tax bills. As you consider planning strategies, focus on flexible techniques that can be modified when new tax laws are passed or your circumstances change.

The primary goal in tax planning is to reduce your taxable income. Most of the strategies to achieve this goal involve:

• Shifting income among related parties such as family members to take advantage of lower rates
• Shifting income to a year in which it will be taxed at a lower rate
• Accelerating deductions or shifting them into a year in which income is taxed at higher rates
• Deferring tax payments to a later year
• Generating tax-free income, often from tax-free investments
• Having a business pay for items not individually deductible

BEWARE THE ALTERNATIVE MINIMUM TAX (AMT)

This tax was created to prevent individual and corporate taxpayers from using deductions, exclusions and credits to avoid paying tax. You are required to compute your tax liability using both the regular and AMT methods and pay the higher tax. The calculation is complicated - especially for corporations. Talk to your tax advisor if you think you may be subject to either a personal or a corporate AMT.

OWN YOUR HOME

Your home can be an excellent vehicle for reducing your tax bill. In addition to a deduction for mortgage interest (limited to $1 million of loan principal for the acquisition of one or two homes), consider the following opportunity. In addition to the $1 million in acquisition debt, the interest on up to an additional $100,000 of home equity debt on one or two homes is deductible, without regard for how the funds are used.

AUTO EXPENSES MAY BE DEDUCTIBLE

If you use your car for business purposes, you may be entitled to deduct a portion of your expenses. Except for self-employed individuals, employees generally may deduct qualifying auto expenses only to the extent they exceed 2% of their adjusted gross income.

To substantiate your deductions you need to keep good records. The standard method bases the deduction on 48.5 cents per mile in 2007, while the actual cost method factors in these expenses:

• Gasoline and oil
• Repairs and maintenance
• Insurance
• Taxes and licenses
• Depreciation
• Parking & tolls (also deductible under mileage method)

Click Here to Read "Tax Reduction Overview Part 2"


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