How to cut your taxes

ALMOST anyone now can reduce his or her taxes by using some techniques that the rich have been employing for years. You do not have to be wealthy to take advantage of them. But do not wait until the eve of April 15 to think about ways to save. Start looking today for deductions and credits that will cut your tax bill for this year and well into the future. The earlier you act, the more you stand to save.

As you read this chapter, you may recognize tax savings that you failed to consider when you filed your most recent tax return. You can correct these omissions by filing an amended return.

Of course, it will not pay to increase your write offs if you do not itemize them. So the first thing to do is add up any expenses that you can write off for the year. The standard deduction is indexed to the consumer price index, meaning that the deduction will rise with inflation. If your total deductions top the standard deduction, then it pays to itemize.

You can give money and other assets to your children. Children under 14 years of age will be taxed at their parents' rate on investment income above $1,000. But children who are 14 and over will pay taxes on all their income at their own rate, which is probably much lower than your own.

Congress also has provided that some investments legally and quite effectively shelter you from taxes. Municipal bonds yield tax exempt current income. Real estate investment trusts can provide tax sheltered income. But anyone mulling over investments that will save taxes is a little like a teenager pondering marriage: you had better be sure that the lust to avoid taxes is not leading you into a disastrous long term commitment.

The surest and simplest way for many people to reduce taxes is to contribute to an Individual Retirement Account. You can deduct the full amount from your taxable income if 1) neither you nor your spouse is covered by an employer retirement plan or 2) either you or your spouse is covered by an employer retirement plan but your adjusted gross income is under $40,000 if married or under $25,000 if single. You will be allowed a partial deduction provided your adjusted gross income is between $40,000 and $50,000 if you are married and between $25,000 and $35,000 if you are single. No deduction will be allowed if your adjusted gross income is over $50,000 if you are married and over $35,000 if you are single. In any case, IRA savings grow tax deferred.

If you want to set up an IRA for this year's income, you can do it any time before you file this year's tax return that is, as late as April 15. But self employed people who want to establish a tax saving Keogh plan have to do it by December 31 of this year or their Keogh contributions this year will not be tax deductible. You can make contributions to your IRA as late as April 15. And if you ask the IRS for an extension, you can contribute to a Keogh until the extended due date of the tax return, as late as October 15 if a valid extension is obtained. This is not true for the IRA.

Taxpayers can take write offs for rooms in their homes that are used exclusively for a profit making business. You also can take some deductions for the purchase of home office supplies, phone bills, utilities, repairs and even maid service and other operating expenses. You can depreciate such assets as file cabinets, desks and typewriters. Instead of depreciating property, however, you can elect to treat all or part of the cost of qualifying property as a currently deductible expense. The total amount that can be expensed for a single tax year cannot exceed $10,000, and is limited to the amount of taxable income that is derived from the active conduct of any trade or business. Any part of the deduction that cannot be taken because of this rule can be carried over to the following taxable year.

If you have a home computer that you use half or more of the time for your business, you can either deduct that portion of the cost from your taxable income in one year or depreciate it in installments over five years. Your business software also may be deductible.

You still can deduct a number of unreimbursed businesses and job related expenses and miscellaneous expenses, but reform has tightened the rules. You must lump your expenses together and write off only the amount by which they exceed 2% of your adjusted gross income. Deductions in this category include union dues, tax preparation fees, job uniforms, job related educational expenses and the cost of business publications including this book.

If you use your car while on the job, you can write off your operating expenses as part of the miscellaneous deductions. Your regular commuting costs to and from work are not deductible. But if you drive your car on business say, to make sales calls the IRS lets you deduct 24 cents a mile for the first 15,000 miles and 11 cents for each additional mile. Unfortunately, this can fall far short of what it costs to keep your car running. Remember, however, that instead you can deduct your actual auto expenses as long as you have the proper documentation. In short, you can fatten your deductions by maintaining thorough records. Start by keeping a log of the miles you drive for business purposes and note your total mileage for the year. Also, keep track of your outlays for gas, repairs and insurance. Then figure out what proportion of your driving is for business. You can deduct that percentage of your costs.

Resolve to keep better records of all your tax deductible expenses this year. As mentioned, at tax time pack rats always pay less. Silly little deductions have a way of becoming impressive big ones. Keep even your grocery receipts when the purchases are for business entertaining.

In 2006, you started to say good bye to your nonmortgage interest payment deductions. That includes credit card finance charges, auto, college and any other consumer loans. Only home backed and investment related loans remain deductible and then only under some circumstances. For example, investment interest expense is deductible to the extent of your net investment income.

Frequently overlooked write offs include the fair market value of property you give to charity, such as clothing (you must itemize your return in order to deduct charitable gifts). If you are itching to change jobs within your current field, you can deduct most travel and other expenses connected with your job search as long as you itemize your return. And do not forget to deduct this year any investment losses from previous years that exceeded the $3,000 annual limit.

Tax credits are much better than tax deductions. Deductions reduce only the adjusted gross income on which your taxes are calculated, but credits reduce your actual taxes, dollar for dollar. So if you have a chance to gain any credits, take it.

If you get an income tax refund this year, there is no reason to feel smug. You just gave the government an interest free loan last year. Had you invested that yourself, you could be hundreds of dollars richer by now.

You can reduce your withholding by going to your employer's payroll office and changing the number of so called allowances on your W 4 form.

To find out how many exemptions you can claim, use your tax return for last year to estimate your deductions for the current year. Then check the table on the W 4 to calculate the number of allowances your deductions generated But do not go overboard. Your withholding and any estimated tax payments have to total at least 90% of the ultimate tax liability for the year, Otherwise, you could be liable for an underpayment penalty.