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LOOK AT TAXES NOW AND SAVE MONEY LATER
COMPUTE EARNINGS, EXPENSES TO DEVISE STRATEGY

SHARE LOOK AT TAXES NOW AND SAVE MONEY LATER
COMPUTE EARNINGS, EXPENSES TO DEVISE STRATEGY

It's never too early to get a jump on your taxes. By taking certain steps now, you can substantially reduce your tax burden for 1989.

"Tax planning is a year-round process," said Arthur Hoffman, chairman of the tax division of the American Institute of Certified Public Accountants (AICPA) in New York."Income, expenditures and investments obviously have an impact on how much tax you owe. By examining these activities and making adjustments where possible, you can exercise a certain amount of control over your ultimate tax bill."

Among the changes in store for 1989:

- The standard deduction is higher this year: $5,200 for joint filers, $3,100 for single taxpayers, and $4,550 for heads of a household.

"If your itemized deductions are less than your standard deduction, you should try to defer as many deductions as possible into 1990 in order to take advantage of them," said Mark Goldman, a partner with the tax firm of Veatch, Rich & Nadler, Chtd., in Northbrook, Ill.

- The amount of personal interest (e.g., from charge accounts and credit cards) you may deduct has been reduced to 20 percent from 40 percent last year.

- Full-time students can be claimed as dependents until the age of 24, regardless of their income.

- Social Security numbers must be listed for all dependents age two and older. If you don't provide a number, you could be fined and your exemption may be disallowed.

- The child-care tax credit can only be claimed now for dependents under the age of 13, rather than the previous age limit of 15 years.

- Home office deductions are curtailed. You can no longer deduct the cost of the first telephone line into your home, even if it is used mostly for business. You can still deduct the second line.

Most tax-planning strategies involve deferring income and accelerating deductions. Hoffman points out that taxes can be reduced by postponing income until a future year, and he advocates trying to offset current income by increasing the deductions you claim at present.

Defering income would be sound if you plan on retiring or leaving work to care for a child. That's because you may be in a lower tax bracket next year. If you expect to be in a higher bracket, you may want to reverse this strategy by accelerating income and deferring deductions.

Here's a few tax-saving tips for the new tax year from the AICPA:

- Reduce your taxable income. The only certain method for lowering your tax bill is reducing your taxable income. For instance, self-employed people can bill clients after the end of the year. You also could make contributions to tax-deferred retirement plans or purchase bank CDs or Treasury bills that pay interest after reaching maturity the following year.

- Bypass the Medicare surtax. If you are eligible for Medicare, you will owe an additional surtax of $22.50 for every $150 of income tax liability. The maximum surtax this year is $800 for singles and $1,600 for marrieds with both spouses eligible for Medicare.

Hoffman said these older taxpayers should try to reduce their taxable income by increasing deductible expenses and switching investments to tax-free instruments, such as municipal bonds.

- Take advantage of a 401(k). This year, you can contribute up to $7,627 to a 401(k) plan. Your contributions will reduce your gross income, and your employer may make additional tax-deferred contributions.

- Contribute to an IRA. If you do not participate in an employer-sponsored retirement plan, you can still deduct IRA contributions. You also can deduct IRA contributions if your adjusted gross income (AGI) falls below certain limits: $25,000 if single, $40,000 if married.

If you meet either requirement, you can deduct IRA contributions up to $2,000 if single and $4,000 if married and both spouses work. If only one spouse works, you can deduct IRA contributions up to $2,250.

If you are covered under a pension plan, your IRA deduction will be reduced by $200 for every $1,000 of AGI over the income limits.

- Your home can be a shelter. While most homeowners know they can deduct mortgage interest on their first and second homes, Hoffman said people often forget to deduct their real estate taxes, points paid to secure a mortgage, and interest on home-equity loans of up to $100,000.

If you sell your home, you do not have to pay tax on the capital gain if you buy a new home at a price equal to or exceeding the sale price of your old abode.

- Prepay state and local taxes. If you pay state and local taxes before December 31, you may be able to deduct them from your 1989 return. However, some states do not allow prepayment, so check with your accountant first.

- Check your withholding. Make sure your employer is withholding enough tax from your paycheck. If you don't withhold or pay at least 90 percent of your 1989 tax liability, you may be charged a 10 percent to 12 percent penalty on the balance due.

Goldman cautions that some of the above tips may not be applicable if you are subject to the alternative minimum tax. It's always a good idea to consult your tax advisor first.