20 smart ideas to reduce your taxes.

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 higher tax bracket next year, it's better to preserve deductions because they'll save you more money in a higher bracket.

3. "Bunch" deductions. If your itemized deductions hover around the same level as the standard deduction, "bunch" or aggregate deductions in a year that you itemize and take the standard deduction the following year. You will be able to take full advantage of the deductions in the year you itemize, without losing anything the next year.

Pay special attention to expenses, such as miscellaneous ones, that must reach a certain threshold to be deductible. These expenses have a threshold of 2% of AGI. Often overlooked in this category are unreimbursed employee expenses, including business meals, overnight travel, professional publications, dues and memberships and professional education. (Remember to keep detailed receipts and records, in case of an IRS audit.)

Many taxpayers never reach the 7.5% level of AGI required to deduct medical expenses because they don't know what's eligible, Howell says. Among the most frequently missed: contact lenses, prescription contraceptives, special equipment for the handicapped, alcoholism and drug abuse treatment and orthopedic shoes.

To maximize this deduction, schedule medical appointments--for example, physicals and eye exams--in the year you itemize, suggests George Corney, a tax research and training specialist at H&R Block Inc. in Kansas City, Mo.

4. Contribute to a 401(k). "The last great tax shelter is the ability to put money into retirement accounts," says Michael van den Akker, a partner in Price Waterhouse's personal financial planning group in San Francisco. Lowering your AGI is just one of the benefits of putting money in a qualified retirement account. You're also advancing toward a major financial goal--a financially secure old age.

The most common option for wage earners is an employer's 401(k) plan. In most cases in 1992, you may defer up to $8,728 to a 401(k). Most employers match a portion of the employee's contribution.

5. Don't forget IRAs. Although the 1986 tax reform restricted Individual Retirement Account (IRA) deductions, it did not eliminate them completely. If you're eligible, make an additional tax-deductible deposit to an IRA. You and your spouse can each take a full $2,000 deduction if your combined AGI is no more than $40,000, or if neither of you participates actively in a employer-sponsored retirement plan. If one of you is covered by a qualified plan and your AGI is more than $40,000, the deduction phases out gradually, disappearing completely at $50,000.

There are significant penalties for withdrawing money from your IRA, or any other tax-deferred retirement account, before age 59 1/2. For more information, consult your tax adviser or IRS Publication 590.

6. Clean house. People don't take full advantage of gifts to charity, says Hutt, who suggests scouring your home for property to donate. "Clothes, home appliances, even automobiles can be donated, and you can deduct the fair market value," he says. Many charities will provide you with a written estimate of the donation's tax value.

7. Offset capital gains. If you're selling stocks, try to balance capital gains with losses. But avoid making sales for tax reasons that you wouldn't otherwise make. "The most important consideration in choosing an investment should be the economic substance of the investment," says Corney. "Tax considerations should play only a minor part in the selection process."

8. Invest in real estate. Real estate was a hot investment in the 1980s; these days, however, with prices stagnating, many investors are leery of real estate. But investing in rental property can still offer tax advantages, says Robyn T. Elliott, a CPA in Culver City, Calif. As long as you actively participate in the investment and your income is less than $100,000, you may deduct up to $25,000 in real estate related losses. That deduction is phased out for income levels above $100,000, disappearing entirely at $150,000. "Ideally, a rental property will have a positive cash flow and a tax advantage," says Elliott. "For example, if you buy an apartment building, rents will pay the mortgage and expenses and then you depreciate the property to generate tax losses."

9. Give appreciated stocks to charity. You get to deduct the appreciated value as long as you've held the investment for more than a year, and you don't have to pay taxes on the gain.

Never donate stocks on which you have a loss. Instead sell the stocks, take the loss and give away the cash.

Corney offers one caveat: Excessive use of this strategy can trigger the alternative minimum tax (AMT), the IRS's way of making sure that higher-income people with many deductions pay at least a minimum amount of taxes. If you think you may be subject to AMT, discuss the subject with your tax adviser.

10. Use flexible benefits plans. Under these plans -- also known as flexible spending or cafeteria plans--your employer deposits pretax income in a special account earmarked for medical costs or child care. After you make approved expenditures, the employer refunds you from the accounts. The limit on flexible spending accounts for child care is $5,000. There is no limit for medical expenses.

The savings from flexible benefits plans can be substantial because the money in the accounts is not reported as wages and is not taxed. If you don't spend all the money in your plan, however, it reverts to the employer.

If you're already using such a plan, review how much you've spent this year and accelerate applicable expenses if you think you might have a surplus. If your employer doesn't have a plan, lobby for one, emphasizing that the only costs to him or her are administrative.

11. Transfer assets to your children. Before 1986, many taxpayers saved or invested for their children's education by giving them cash, stocks or bonds. The interest and dividends were taxed at the children's much lower tax rate.

The so-called "kiddie tax" has reduced, but not eliminated, the advantages of this strategy. Children under 14 pay no tax on the first $600 of unearned income and 15% on the next$600. The kiddie tax kicks in at $1,200. Every dollar beyond $1,200 is taxed at the parent's presumably higher marginal tax rate.

"The first rule of saving for education is, take advantage of the $1,200," says van den Akker. You may give your child up to $10,000 per year ($20,000 if giving jointly with your spouse) without incurring any gift taxes.

Van den Akker suggests giving something with tax deferral built in, such as growth stocks that will not be sold until after the child turns 14 and the kiddie tax no longer applies.

If you're concerned about control, you may set up a Uniform Transfer to Minors Account (UTMA) or a Minor's Trust. Either lets you put the assets in your child's name but act as trustee until the child reaches 18 or 21, depending on the state.

12. Buy Series EE U.S. savings bonds. The bonds are currently paying 5.58% interest and sold at 50% discount on face value. Interest earned on bonds issued after Dec. 31, 1989, is totally free of federal tax if the money is used to pay for qualified education expenses for you, your spouse or your dependent, and if your AGI falls within certain limits. To take full advantage of the program in 1992, heads of households and single taxpayers must have AGI below $44,150. Married couples filing jointly may have AGI up to $66,200. For joint filers, the exemption is gradually phased out between AGIs of $66,2D0 and $96,200 ($44,150 to $59,150 for heads of household and singles).

To qualify for the exclusion, the bonds must be purchased by someone who is at least 24 years old on the date of purchase. Gift bonds in the child's name do not qualify.

If the proceeds of the bond will not be used entirely for education, it may make sense to put them in your child's name, says van den Akker. That way the interest will be taxed at the child's rate if he or she cashes them in after age 14.

13. Stay informed. Even if you have a tax adviser, you should always be on the lookout for potential deductions. One source of information, says CPA Henderson, is IRS publication 17, "Your Federal Income Tax." The 1992 edition will not be available until Jan. 2, 1993. For more information, call 800-829-FORM. The free book can tip you off to obscure but useful deductions such as the $102 one-time credit for buying a diesel car. "It's a fairly decent little credit, but hardly anyone knows about it," says Henderson.

Henderson also counsels taxpayers to look for discrepancies between state and federal tax law. Although most states base their tax code on the federal statutes, some deductions allowed by the IRS may not be permitted by your state or vice versa.

Some states, for example, have no threshold for deducting medical expenses. "The differences are both positive and negative," Henderson says. "You should know about them and take advantage of them."

14. Double check your estimated tax calculations. Your goal as a selfemployed individual is the same as that of a wage-earning employee--to reduce your taxable income by deferring income and accelerating expenses. In fact, you have an even greater incentive to lower your AGI, because you pay the 7.65% self-employment tax equivalent to the share of social security usually paid by an employer.

Self-employed taxpayers miss out on tax breaks such as flexible spending plans. On the other hand, they may also take some deductions not allowed to wage earners. Financial experts offer the following advice.

Try to pay as close to the correct amount as possible. Underpaying could cost you hefty penalties on April 15. Overpaying is almost as bad because your excess payments add up to an interest-free loan to Uncle Sam.

15. Set up and contribute to a tax-deferred retirement plan. Your two main options are Keogh and Simplified Employee Pension Plans (SEPs). Your tax adviser can help you figure contribution limits and advantages of the different plans. In general, the SEP "is easier to administer with fewer forms and lower administrative costs," says van den Akker. "The Keogh has a little more flexibility, but if you're a one-person shop or have just a few employees, the [SEP] is the way to go."

The deadline for setting up a Keogh is Dec. 31, but you have until the tax filing deadline to contribute. You may set up and contribute to a SEP any time before the filing deadline, including any extended deadlines you might request.

16. Take the child-care credit. If you can't participate in a flexible benefits plan for child-care expenses, the next best option is the child-care credit, which allows you to deduct 20% to 30% of childcare costs, depending on your income. A few disadvantages exist, however. First, costs are capped at $2,400 for one child and $4,800 for two or more children. Secondly, the IRS now requires you to list on your return the name, address and social security number of the care giver, who may be reluctant to supply this information.

17. Don't forget health-insurance deductions. If you're self-employed and not eligible for subsidized insurance from your spouse's employers, you may be able to deduct up to 25% of the premiums you paid for yourself and your family, This amount should be entered on line 26 of Form 1040. If you itemize deductions, include the remaining premiums with other medical expenses on Schedule A.

18. Buy equipment. If you've been coveting a plainpaper fax machine, an upgraded computer or a laser printer, now may be the time to get it. Small companies may deduct up to $10,000 in equipment the year they buy it, instead of allowing it to depreciate over time.

The higher your tax bracket, the lower the actual cost of the equipment. Suppose you're in a 40% combined state and federal tax bracket. That means a $1,000 deductible expenditure lowers your tax liability by $400, costing you only $600 in real terms.

One caveat: The amount deducted cannot be more than your taxable self-employment income. For example, if you buy a machine that costs $8,000 in 1992, but your income is only $6,000, you may deduct only $6,000. But the remaining $2,000 may be carried over as a 1993 deduction.

19. Hire your child part-time in the family business. The child can use the money--taxed at his or her lower rate--to save for college. Traditionally, the first $500 of your child's annual earned income is tax-free. Children under age 14 are taxed at the child's tax rate on income between $500 and $1,000; any investment income over $1,000 is taxed at the parents' marginal tax rate. For children age 14 and older, any income above $500 is taxed at the child's rate, which usually is more favorable than the parents' rate. Experts say that the parents' income, the child's age, salary and the legitimacy of the child's job are all variables that will determine if this is a tax break or a tax barrier. Also tax laws are subject to change. Check with your accountant for more details. But in general, as long as the job is legitimate and the pay rate reasonable, the child's wages are a deductible business expense. Don't forget to check you local child-labor laws, which vary by state.

20. Keep good records. "The best advice we can offer is to keep good records," says Corney. "For example, business mileage is deductible, but many people are so lax in recording business mileage that they lose a large part of a legitimate deduction."

Record-keeping is particularly important for taxpayers who work at home, since the IRS now requires you to fill out a separate form for home office deductions, and is cracking down on improper use of this deduction.

If you own a computer, you might also want to consider any of a dozen tax-planning software packages. Such programs can help you to manage your tax files and ease the pain of sorting through hordes of receipts. Many of today's advanced software packages provide more than tax preparation--they can help you analyze your tax situation. By modifying a few variables, you can even use tax software to project your tax bill under various scenarios.

The bottom line, say financial experts, is planning, and plenty of it. Coleman, for example, advises updating your tax planning whenever "a significant event" occurs in your life. "Starting a business, buying or selling real estate, retirement, receiving a retirement plan distribution, refinancing your mortgage, marriage, selling assets, a large donation to charity--any of those would warrant a tax consultation," he says.

Of course, for most people, tax planning is a lot like going to the dentist. You know you should do it, but you keep delaying. Try thinking of it this way. If you delay too long, April 15 could hit you like a root canal without Novocain. Is that a wallop you can afford?