Tax return : the basics

Taxes are compulsory charges or levies collected by states or anything that functions like a state. In a modern society, taxes are usually levied in money. Taxes have always been gathered in one way or the other. Tribal governments used to collect taxes either in the form of labor, produce or even gold.

In the past, taxes have sometimes funded wars or projects. In the modern context, taxes are essential to help a country build infrastructure, offer education, maintain law and order, finance economic structures, roads, administration, defense, etc.

In 1913, President Woodrow Wilson set up the Federal Income Tax. This income tax system deducted about 1% to 7% of a person?s income. Ever since then, new taxes have been added, and after World War I, the American Tax Code has become four times bigger.

In America, citizens who earn above a certain level are expected to file tax returns, and pay taxes if applicable. You are not expected to file returns if you have salaries and pensions taxed under Pay As You Earn (PAYE). This is because the correct amount of tax is being deducted at source.

Tax returns are essentially forms given by the Internal Revenue Service (IRS) in which all the details of income and incurred expenses have to be given. The taxes that you have to pay are calculated based on this. An individual can calculate these taxes, or the IRS could do it.

The form has one page, which everyone has to complete, and nine supplementary forms, which people with specific types of income have to file. There is also a supplementary booklet that helps to file taxes.

You are expected to file returns if you are self-employed, have other income received in gross and from which taxes have not been cut, such as rental income from property, interest in a national savings income account, etc. Returns would also have to be filed if the taxation rate is high or complex.

Sometimes the IRS many issue tax return forms to you even if you pay taxes under PAYE. This happens if you have changed jobs and it is to check if your taxation is in order.

Always file your tax returns if you know that the correct amount of tax has not been paid on your income. Do not wait for the IRS to send you a tax return. If you fail to do so you may pay a fine or incur a penalty. Several people have gone to prison for failing to file their taxes correctly.

Send your tax returns back to the local tax office by January 31st after the end of the tax year; otherwise you will automatically incur penalties. If you want the IRS to do the tax calculations, you must send the completed return to the local tax office by September 30th following the end of the tax year.

Tax Returns provides detailed information on Tax Returns, Income Tax Returns, Tax Return Filing Preparations, Federal Tax Returns and more. Tax Returns is affiliated with Free Tax Filing.

Tax return preparation is an important aspect of payment of taxes annually. Tax payment to the government is mandatory for an individual who has an income. It is very essential for an individual to pay his taxes timely. Tax preparation is a demanding task and so it must never be left for the last minute. It is advisable to get professional help for your tax return preparation.

During the peak taxing season there is a mad rush of people to file their taxes in time. Accountants and accounting firms get busy preparing tax returns of individuals. The workload on accounting firms during this time is pretty hectic. If you find that handling the tax returns have become very demanding on your accounting firm, outsource tax returns. Outsourcing tax returns is the best way for you to deal with these demands.

There are a number of outsourcing companies which will do the work for you for a certain amount of money. All you need to do is find a company which is competent enough to do the work for you. Most of the outsourcing companies have highly trained professionals to help you out.

Tax return outsourcing is one simple method to reap many benefits. First of all you are able to handle the mad rush made by your clients during the tax season. You do not have to make an extra effort or put any additional strain on your existing staff at the firm. Outsourcing the tax return process takes care of everything for you.

Due to outsourcing your tax return preparation you will be able to deliver professional service to your clients. You will be able to give this to your clients without undertaking any new fixed costs. The professionals in outsourcing companies are adequately equipped to deal with different types of tax returns like individual tax returns, business tax returns and corporation tax returns are a few of them.

For accounting firms to prepare your tax returns, you will have to provide them with some information. Some of the information which you will need is your social security number, driving license, information on the major expenses incurred during a financial year. All these information along with some others is vital for preparing your tax return.

Tax payment must never be a harrowing experience for you. Preparing your own tax returns can be very tiring and time consuming as well. There are professionals to help you out in this regard. Seek their help and pay your taxes without any worries.

To know more about tax return preparation, visit http://www.ifrworld.com

James Crystal running a small scale outsourcing company (services: employee leasing, accounting outsourcing, tax return services) in New York.

The following list includes the 10 items you are likely to need when preparing your tax return. Although you may be required to provide additional information, this list brings you the most common items we have identified based on hundreds of our clients’ tax returns.

1. IRS form W2 -

summarizes your annual taxable wages, federal income tax withheld, social security withheld, Medicare withheld and state income tax withheld. Additionally your contribution to an employer based retirement plan is also listed on the W2.

2. Rental Income and Expenses, Cost of Property, Date property placed in service -

Rental income include actual payments received by the tenants during the tax year. As a cash basis tax payer, do not include any payments still owed by the tenant for the year, only payments received. Rental expenses include: management fees, mortgage interest, insurance, condo fee, cleaning, utilities, advertising, travel to and from the property, real estate taxes, legal and other professional fees and brokerage commissions. Cost of property and date placed in service are necessary to calculate depreciation.

3. Family members: Names, DOB, Social Security Numbers, Full Address -

To calculate personal exemptions, child tax credit, education credit, and child care expanse credit. Additionally EIC (”Earned Income Tax Credit”) is also calculated using this information.

4. Mortgage Interest Payments in 2005 (or form 1098) -

form 1098 summarizes your annual mortgage interest payments and any real estate taxes paid through your mortgage escrow account.

5. Property tax payments in 2005 (or form 1098) -

If you pay your real estate taxes independently of the mortgage escrow account you will need copy of your property tax year for the year or copies of cancelled check with which you paid your property tax.

6. Child care expenses paid in 2005 (for each child and per child care provider) -

The information necessary to calculate child care expenses credit includes names and social security numbers of the children, names, addresses and tax ID numbers of the day care providers.

7. Amount of money taken out from 401K (or form 1099-R) -

The IRS requires that your 401K company reports to you on IRS Form 1099-R any distributions that you took from your retirement plan last year even if you rolled them into another plan. The same information must be submitted to the IRS.

8. Interest / Dividend Income (US or foreign) (form 1099-INT, 1099-DIV) -

Those forms summarizes the interest and dividend payments you have received during the year from your bank, brokerage firm or any other U.S. source. The information provided to you is also submitted to the IRS.

9. Stock Sales and cost (form 1099-B) -

Summarizes the proceeds you have received from selling stocks during the year. The form lists the symbol of the stock sold, date of sale and number of units sold, proceeds received and commission paid. To calculate capital gains or losses you must assign cost to each of the stocks you have sold, and then need to group the stocks into 2 categories: long term (stocks held for a year or more) and short term (stocks held for less than a year).

10. Business Income and Expenses (or employee un-reimbursed expenses) -

Home office - if you use portion of your residency as home office

Job search - resume writing, interview travels, fax and phone calls, retainer paid to a job search firm

Professional expenses - courses and licenses

Investment expenses - margin interest

Travel - business travel or work related travel

Seminars - to keep you up to speed

Professional literature - books to maintain your experience and knowledge

Tax preparation expenses - payments to tax advisor or tax software

Legal expenses - if it was paid to generate income

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Do you like to hear the words “tax return?” You may if you are an accountant or if you always get a tax refund. Otherwise, these words may strike anxiety and fear into your heart and mind. Every year in the days, weeks and months before April 15th, people all over the U.S. rush to complete their tax return and check it for accuracy before they mail it in.
A big part of the work is collecting all of the documents and information that you will need to prepare your tax return whether you are doing it yourself or with someone else’s help.

Some people and small businesses hire an accountant or a tax preparation service to get their tax return ready to send in to the IRS. An accountant is a good choice if you know someone that you can trust to do it accurately and quickly. They should have CPA certification and be recognized by the regulating organization in your state. Once you have selected an accountant, make sure that they have all of the paperwork that they need to do your tax return.

As mentioned before, many people use a tax preparation service when they are filing a tax return. Sometimes these services offer specials and deals on their products such as free e-filing or a free state return when you do a federal return. Try to find a service that guarantees their work in case there are errors. Sometimes you can even take in your old returns and have them redone to find any money that you might be owed from past years. These types of services are usually quick and efficient.

Tax preparation software is available online through a download or you can buy it at a store. You can do your tax return easily and privately at your own pace in your own home. You can get professional or basic editions of the software depending on your needs and most of the programs will check for accuracy and errors before you file the return. You can even use these types of programs to e-file.

A free or low-cost option for lower income families and individuals is to go to VITA/TCE which is a volunteer group which does tax preparation for free for seniors and low-income individuals and families. Or, you can look at the IRS website and they will match you with a free tax preparation service according to your needs and income level.

Eriani Doyel writes articles about Finances. If you would like more information about tax refunds visit faqtaxes.com

Philadelphia Inquirer of March 21 reports IRS plans to allow
Tax preparers to sell your tax return data to marketers.

http://www.philly.com/mld/inquirer/business/14147002.htm

The IRS is considering a rules change that would allow our
most trusted financial advisors to sell entire tax returns of
consumers to marketers and data brokers! This would not only
be a serious ethical violation and breach of trust by tax
preparers, but may entirely undermine taxpayers trust in our
tax systems in the US.

This rules change is apparently proposed at the behest of
Congressman Ed Markey of Illinois who raised privacy concerns
when it was discovered that some tax preparers were
outsourcing tax preparation online to India and other
countries without privacy protections. It was supposedly to
prevent the loss of financial information to identity
thieves. How ironic that the rule change was proposed as a
privacy protection, when it allows outright sale of tax
returns to marketers and data brokers.

While so-called notification and consent by taxpayers is
required to allow this sale of information - can you imagine
anyone questioning their accountant about why he is asking
them to sign papers following tax return preparation? Most of
us put full trust in our tax preparers, accountants and
financial advisors when asked to sign documents. (I don’t
condone this, it’s just the way we operate - every person
should read every document and fully understand them
before signing.)

If tax professionals suffer even a momentary flash of
reduced ethical and moral standards during that brief signing
- they may choose not to disclose what we are signing and
count on us to either ask pointedly about the documents or
that we read large sheafs of prepared paperwork to find out
that we are about to sign away our financial privacy along
with signing our tax returns.

By now we should all be painfully aware of the endless stream
of data breaches, hacks, and dozens of cases of ineptitude by
data brokers and handlers of private personal financial
information.

This issue has somehow escaped much public notice since it
was first proposed by the IRS on December 7, 2005. Here is
the official government notice of the proposed IRS Rule
Change allowing the sale of tax return data by tax preparers
(38 page PDF file).
http://www.irs.gov/pub/irs-regs/13724302.pdf

The Philadelphia Inquirer offered an address to protest the
rules change. It’s too late to comment electronically, but the IRS
may still consider written comments by mail if you write to:

CC:PA:LPD:PR (REG-137243-02)
Room 5203
Internal Revenue Service, Box 7604
Ben Franklin Station, Washington, D.C. 20044.

This is so patently offensive that it is difficult to
comprehend. I want to know who convinced the IRS rulemakers
to slip this proposal in so quietly. Did Congressman Markey
have a hand in the rule language or was that a back room deal
with data brokers?

Could it be that it was a lobbyist for beancounters who
make their living by doing taxes for median income families?
It certainly isn’t likely to have been Ernst & Young looking
for extra little profit centers they might exploit in their
corporate client tax filings.

Who would profit most from this? The data brokers and credit
reporting agencies - just follow the money. Who wants access
to broad swaths of taxpayer information? Those who don’t
currently have it yet - marketers, and dozens of subsidiary
data brokers who currently don’t have access to income
(and spending) data of Americans directly from tax forms.

Imagine rich new income streams data brokers would have to
sell information to marketers about our buying habits, airline
preferences, hotel choices, internet service providers,
travel information, cell phone providers - all right there on
our itemized deductions list.

A joint press release has been distributed by three separate
consumer organizations calling for removal of language in
the proposed rules that would allow for sale of information
in taxpayer tax returns to third parties for purposes of
selling “Subsidiary Services” to taxpayers. That broad
language is the focus of concern.

http://snipurl.com/IRS_Privacy (Consumer Federation PDF)

Since many of us are on the current “Do Not Call” list and
out of reach of telemarketing annoyance, you can bet your
junkmail volume would increase dramatically after your
spending habits are so well documented to marketing firms -
right off of your tax forms, which they legally purchased!

If this were the only concern - it would be enough to rattle
most Americans trust in our government. But it isn’t the end
of the story - we lose control over our financial data and
risk identity theft on a grand scale once the information is
in the hands of marketers. Just stop what you are doing and
go write a letter to the IRS at the address above to demand
that they stop this sellout to data brokers and marketers.

Copyright © Mike Banks Valentine March 29, 2006

Mike Banks Valentine blogs on privacy issues at:
http://PrivacyNotes.com/privacy_blog/ You can subscribe
to the RSS feed by entering My Yahoo or My MSN at:
http://privacynotes.com/privacy_blog/atom.xml
Web Content Resource From http://Publish101.com

The term tax is very annoying to many ears. We must all accept the fact that there are many things that we do not like to do, but we have no choice in some matters. Tax return preparation is one such thing that any individual who has an income must do it. All individuals who have an earning are liable to pay taxes to the government. Tax payment is done annually and every individual must be prepared well in advance to pay his taxes and pay it in time. Tax return is the official document that lists the amount a person has to pay as taxes. Amount of tax is calculated on the basis of his earnings.

Well, it is understandable that every individual will not have the capacity to accurately calculate taxes. So the best way for an individual out of this mess is to hire services of professional tax return calculation personnel. Once you have actually decided to hire the services of a professional to do your tax return preparation work, make sure that you hire services of the best in the business. After all, you are giving out money to hire the professional and you must get the best worth of your money.

If you personally know of some accountant who will do the work for you, then there is nothing better then this. He can trust him fully to do your work in the best possible manner. Before you hire a professional to do the work for you, make sure that he is fully equipped to do exactly what you want him to do. Just check that the accountant has a professional CPA qualification recognized by regulating authority of the state where you reside. Take care to keep all your paper work that you will need in proper order to be used by the accountant.

It is a good idea to have your tax return preparation calculated well in advance. Tax payment is a seasonal affair and everyone is in huge rush to get tax returns prepared in time to pay the taxes to the government. So, it is very much possible that at the eleventh hour you may find that all CPAs have been booked, and there is no one who can do the work for you. So in this regard getting the work done well in advance will help you in dealing with any situation. You will not face any last minute delay and fill the taxes in time without any hassles.

If you are keen on doing the work on your own, you can do that also. You can do your own tax return preparation with the help of certain software that is specially designed for this purpose. You can find the software online. All you need to do is download it and install the software in your computer. You can sit in the privacy of your home, at your own convenient time and do the work peacefully. So you see that it is only matter of making choices, you just need to ensure that you make the best possible choice under the given situation for calculating your tax return preparation.

Michelle Barkley is a CPA working for Ifrworld.She specializes in Accounting Outsourcing, Bookkeeping Outsourcing and Tax Return Preparation. To know more and to use the services visit http://www.ifrworld.com.

Your business activity must be included on a federal tax return. Which return and when it’s due will depend on your choice of entity selection. If you are a sole proprietor or a single member LLC, put it on schedule C of your individual tax return (form 1040). Otherwise, it goes on a separate tax return. If you had expenses only but no revenue, you should still complete a return to utilize the loss either this year or to create a net operating loss carry forward or carry back.

Revenue Tax: Washington State imposes a tax on total revenue. Some cities impose a similar tax. These returns are due either monthly, quarterly or annually. The state (and perhaps your city) will assign a frequency based on information you put on your business license application. Getting help from a professional can save you the trouble of completing returns more frequent than needed. The tax rate depends on the type of business. Many service businesses pay a state revenue tax of 1.5% of gross sales.

Sales Tax: Washington State imposes a sales tax on the retail sale of tangible goods and many services. This tax is reported on the same revenue return discussed above. Thus, it can be due monthly, quarterly or annually. The rate varies depending on your location.

Other State Taxes: The State imposes other taxes on specific industries. For example, hotel/motel tax, public utilities, tobacco products, refuse collection. Consult a tax professional regarding taxes for your industry.

Employment Taxes: When you hire your first employee, the government gives you a few more rolls of red tape. Both the State and the federal government impose a variety of taxes on businesses that have employees.

Federal Employment Taxes: The federal government requires all employers to complete quarterly employment tax returns (form 941). These returns are usually due the last day of the month following the quarter. Form 941 tells the IRS how much income tax you withheld from employees, how much social security and medicare you withheld and the employer’s contribution to social security and medicare.

Tax accountant John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Kent Everett area on various tax issues. His firm, Huddleston tax accountants, also provides tax preparation service, quickbooks consulting and general accounting and bookkeeping service. Seattle Bellevue tax accountant John Huddleston is a frequent publisher of tax saving ideas.

Here are seven reasons for not being late filing your
income tax returns.

1. Avoid Late Filing Penalties

Late filing can result in substantial and continuing
penalties. This is in addition to any interest that is
due.

2. Receive Better Service from Your Accountant

The earlier you get your paperwork to your accountant,
the sooner he can start preparing your tax returns. More
importantly, there will be more opportunities to explore
and implement tax saving strategies. On the other hand, if
you file late, you tie your accountant’s hands. For example,
he may hesitate to retain profit in your corporation if
such profit will be subject to substantial penalties.

3. Avoid Criminal Charges

Of course, if you don’t file tax returns at all for a few
years, you may also face charges of tax evasion.

4. Prevent Bankruptcy

Generally speaking, persons who don’t file tax returns on
a timely basis also lack adequate records for managing
their business. Since they don’t keep their bookkeeping
and accounting up-to-date, they only think they know how
they’re doing and how they stand financially. This, of
course, is a recipe for financial disaster.

5. Enjoy Better Relations with Tax Authorities

Late filers also receive the unwanted attention of the
taxation departments. Non-compliance can result in audits,
aggressive collection action and legal proceedings. In
addition, if you ever do have extenuating circumstances
that might call for some leniency or extraordinary
consideration on the part of the tax department, you are
more likely to receive it if you have a flawless history
of co-operation and compliance.

6. Obtain Financing

You’ll have difficulty obtaining financing if you can’t
provide your financial institution with current income
information. Assessment Notices from taxation authorities
give banks more assurance that the income claims you make
are true. As well, if you haven’t filed your current income
tax returns, what hidden tax liabilities exist? What is the
state of your record-keeping? How do you run your business
without adequate financial information? Your bank may
hesitate to loan you money or refinance under these
circumstances.

7. Reduce Stress and Worry

Many people who are late filing their tax returns feel
guilty about it. At the back of their minds, they worry
about taxation authorities contacting them, audits, asset
seizures, criminal prosecution, penalties and interest, and
so on. Some of these worries can become magnified beyond
what the actual situation warrants. Save yourself
unnecessary stress by filing your income tax returns
on time.

RESOURCE BOX

J. Stephen Pope, President of Pope Consulting Inc.,
has been helping clients to earn maximum business profits
for over twenty-five years.

For profitable Work at Home Small Business Ideas,
visit http://www.yenommarketinginc.com/

To learn how to reduce your income taxes, visit
http://www.yenommarketinginc.com/income-taxes.html

Each year there are millions of Americans who prepare their own federal and state tax returns and even more individuals have their taxes professionally prepared. Whatever choice a taxpayer makes there are a number of important tax tips that everyone should know.

A W-2 or 1099MISC is needed to accurately prepare a federal or state income tax return. There is always a chance that a taxpayer may misplace these forms or for one reason or another the forms may not have reached them. For federal tax returns and most state tax returns a W-2 or a 1099MISC is required. Individuals who do not attach these items are likely to prevent their tax returns from being processed or cause a refund delay. The Internal Revenue Service (IRS) states that all taxpayer should receive their W-2 or 1099MISC forms before February 15th. Individuals who did not receive these items are encourage to contact their employer to determine why the forms have not arrived. Taxpayers who misplaced their W-2 or 1099MISC forms are encouraged to contact their employer right away to receive a copy. Taxpayers must do so because even if a wage or income form is missing a tax return is due on the traditional April 15th deadline or else late fees and penalties may be assessed.

Another one of the popular tax tips that taxpayers should know about is tax deductions. It is estimated that each year the American public loses millions of dollars from tax deductions that they were entitled to, but failed to claim. A professional tax preparer and a tax software program may prompt an individual to claim tax deductions that they qualify for. Individuals preparing their own paper taxes are more likely to miss tax deductions that they may claim. To prevent this from happening taxpayers are encouraged to research the most frequently overlooked tax deductions to determine which deductions they may qualify for.

Another one of the most common tax tips that taxpayers need to be aware of is what to do if they can’t pay the amount of taxes owed on federal or state tax returns. The biggest mistake that taxpayers make when realizing that they cannot pay the amount due on their taxes is to not file a tax return. Some people think that not filing a return will prevent a refund from being owed on time when in reality it can make the situation a lot worse. Taxpayers can file an extension deadline; however, the estimated amount of taxes owed is still due on the traditional tax deadline. The Internal Revenue Service (IRS) will impose a number of late fees and penalties on tax payments that were not received in time. Just ignoring the Internal Revenue Service (IRS) may increase the number of or the amount of penalties.

One of the most important tax tips that a taxpayer needs to keep in mind is that the Internal Revenue Service (IRS) and many state governments change or update their tax laws each year. For this is reason taxpayers are encouraged to check out the website of the Internal Revenue Service (IRS) or the website of their state tax department to determine if any of the tax law changes need to be applied to their federal or state tax returns.

These helpful tax tips are just a few of the many tax tips that can help tax preparation flow more smoothly. The above mentioned tax tips will also help to reduce the amount of money that an individual owes on federal or state taxes or even potentially increase the amount of their refund. Why pay late fees or lose money on tax deductions that you deserve? Let these and other helpful tax tips assist you this tax season.

http://www.taxhelpdirectory.com/irs/irstaxlaw/

About The Author
Gray Rollins is a featured writer for the Tax Help Directory. To learn more tax tips, visit http://www.taxhelpdirectory.com/taxtip/ and for more tax information, visit http://www.taxhelpdirectory.com/taxinformation/.

Most taxpayers concentrate on ways to reduce their “taxable income”. However, beginning with the Tax Reform Act of 1986, your “Adjusted Gross Income”, or AGI, has become the most important number on your tax return.

Many tax credits and deductions are phased-out, or altogether eliminated, based on your AGI, or in some cases a “Modified” AGI (no gift from this MAGI), and several items of income are increased and some deductible losses are reduced as this number grows.

The Tax Reform Act of 1986 started the ball rolling by limiting the allowable rental loss deduction for taxpayers with an AGI in excess of $100,000 and phasing-out the amount of IRA contributions that could be deducted based on an AGI threshold. The Budget Reconciliation Act of 1990, the Taxpayer Relief Act of 1997 and the many tax Acts passed under George W all continued the trend of limiting credits and deductions based on AGI.

Items that are affected by your AGI (or MAGI) include:

* the taxable portion of interest on US Savings Bonds used to pay for education,

* losses from rental real estate activities with active participation,

* the taxable portion of Social Security and Railroad Retirement benefits,

* deductible traditional and spousal IRA contributions,

* the ability to contribute to a ROTH IRA, and to convert a traditional IRA to a ROTH,

* student loan interest,

* the deduction for tuition and fees,

* medical and dental expenses,

* charitable contributions,

* casualty and theft losses,

* job expenses and most other “miscellaneous” deductions,

* total Itemized Deductions,

* the deduction for personal exemptions,

* the dreaded Alternative Minimum Tax (AMT),

* the Credit for Child and Dependent Care Expenses,

* the Credit for the Elderly or Disabled,

* the HOPE and Lifetime Learning education credits,

* the Retirement Savings Contributions Credit,

* the Child Tax Credit,

* the Adoption Credit,

* the Earned Income Credit,

* Coverdell Education Savings Account contributions, and

* the safe harbor amount for quarterly estimated tax payments.

Each of the items listed above has a separate set of AGI thresholds. For some items, such as the education credits and the deductions for student loan interest and tuition and fees, the amount for joint filers is twice that for unmarried taxpayers; for some it is not. For the reduction of Itemized Deductions the threshold is the same whether you file as Single, Head of Household, Married Filing Joint or Qualifying Widow(er). In some cases married taxpayers filing separately are not allowed the deduction or credit at all; in others the threshold for separate filers is half that for joint filers.

While qualifying dividends, capital gain distributions and long-term capital gains are taxed separately at a lower rate, both for the regular tax and the AMT, these items of income are included in your AGI, as well as your Alternative Minimum Taxable Income (AMTI), and can reduce or eliminate the various deductions and credits affected by AGI, and cause you to become a victim of, or increase, the AMT.

Because of the way the taxable portion of Social Security and Railroad Retirement benefits is calculated, for every additional $1.00 of AGI you could be taxed on as much as $1.85. For a taxpayer in the 15% federal tax bracket who finds himself in this situation a $1,000 increase in AGI could increase the tax liability by $278.00 - almost 28%.

There are several moves you can make to reduce your AGI:

* Maximize “pre-tax” contributions to your 401(k), 403(b) or other pension or deferred compensation plans, including any “catch-up” contributions for participants age 50 or older.

* Maximize the amount of wages set aside in an employer-sponsored “pre-tax” medical expense or dependent care flexible spending account.

* Postpone the receipt of a year-end bonus until next year.

* Postpone billing clients until January, accelerate or prepay business expenses at year-end, and maximize contributions to a SEP, SIMPLE or Keogh plan if you are self-employed.

* Accelerate or prepay expenses at year-end if you own rental property.

* Sell investments at a loss to take advantage of the maximum $3,000 net capital loss deduction.

* Maximize deductible contributions to a traditional IRA, including catch-up contributions.

* Instead of deducting the total fee for tax preparation as a “miscellaneous” deduction on Schedule A, allocate a portion of the fee, if applicable, to Schedule C and/or Schedule E.

* Invest in tax-free municipal bonds or tax-deferred US Savings Bonds instead of bank CDs (remember that tax-exempt interest is included in the calculation of taxable Social Security and Railroad Retirement benefits).

Let us look at an example where reducing AGI by $1,000 could result in $913 less federal tax - a 91.3% tax savings!

John and Jane Q. Taxpayer anticipate an AGI of $130,450 for 2005. They will be in the 25% tax bracket. John and Jane have three dependent children, two under age 17 and one who is a college freshman. They paid $5,000 in college tuition and their miscellaneous deductions are more than 2% of their AGI.

If J and J gave an additional $1,000 to charity before year-end they will save $250 in federal income tax. If, instead, they can reduce their AGI by $1,000 they will put an additional $913 in their pocket.

By reducing their AGI from $130,450 to $129,450 they will be able to deduct an additional $2,000 in tuition and fees as an “adjustment to income”, which will further reduce their AGI. This brings their total AGI reduction to $3,000. As a result they will be able to deduct an additional $60 in miscellaneous deductions on Schedule A. The taxable income on their 2005 Form 1040 is reduced by a total of $3,060, which will translate to $763 less income tax.

The Child Tax Credit is phased-out by $50 for each $1,000, or part thereof, that a married couple’s AGI exceeds $110,000. By reducing their AGI by $3,000 John and Jane will increase their Child Tax Credit by $150. The total tax savings is $913 - $763 in reduced tax liability and $150 in increased Child Tax Credit.

Robert Flach is a tax professional with 34 tax seasons of experience preparing 1040s for people in all walks of life. He writes THE WANDERING TAX PRO weblog (rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (rdftaxpro.tripod.com/newjerseytaxpractitionernetwork) and the tax planning and preparation website http://www.robertdflach.net, which provides a wealth of tax advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. This article is expanded from a 2004 posting to THE WANDERING TAX PRO.