101 PERFECTLY LEGAL TAX WISE STRATEGIES

2) For married taxpayers filing separately, the personal exemption phaseout begins at adjusted gross income of $83,850 and ends at $145,100 in 1994. For married couples filing jointly, the phaseout begins at AGI of $167,700 and ends at $290,200 in 1994. The result is that if married taxpayers are subject to the phaseout on a joint return but do not have equal incomes, they can avoid the phaseout by filing separate returns. To benefit, the lower-earning spouse must have AGI of less than $83,850 and be able to claim the dependency exemptions for the children as well as his or her own personal exemption. This means that spouse must separately provide over half the support during the year. To ensure there is proof, we advise separate bank accounts to pay for support items. See IRS Publication 17 for a list of the expenses that are considered support items. When the marital home is jointly owned, each spouse is considered to contribute half of the cost regardless of the actual contributions. Separate filing might backfire, however, for some married taxpayers with a large amount of itemized deductions. That's because the itemized deduction reduction for married couples filing separately begins with an AGI of only $53,900 in 1994. Because of this lower threshold, some couples will find that the higher-income spouse will lose more itemized deductions by filing separately than they would have lost on a joint return, and this loss will reduce or eliminate the tax benefit of saving the dependent exemptions. Using the long form can pay off even if you don't itemize deductions. Some deductions are known as adjustments to income or above-the-line deductions. These are available whether or not you itemize expenses. But they are not listed on the 1040A short form. The long form lists additional adjustments you might be entitled to such as Keogh plan contributions, penalties paid on early withdrawals of savings, alimony payments and the disability income exclusion. The long form also lists tax credits that are not mentioned on Form 1040A.

3) Tax return due on April 15 and you're not ready to file? One way to extend the filing deadline is to file for an automatic extension with Form 4868. Another way is to be residing outside the United States on April 15. If you are residing outside the United States you get an automatic extension of your filing deadline to June 15. But you must be residing outside the United States on April 15. It used to be that you could qualify for this extension if you were simply traveling outside the U.S. on April 15. That is no longer good enough. Another way to get an extension if you are living outside the United States is to file Form 2350 before the due date for your return. This can be used if you anticipate owing no tax on your foreign income. This usually is used because you expect to meet the requirements for using the foreign earned income exclusion sometime after the return is due.

4) Can't pay? File anyway. If you have money due on your tax return and can't pay your taxes, you should still file your tax return on time. This alone will avoid the failure-to-file penalty and save you some money. Send as much money as you can with the tax return and attach Form 9465, Installment Agreement Request, to the front of the tax return. On Form 9465, give the amounts you can pay and the dates you can pay them. The IRS will usually allow you to follow the installments requested or will work out other options with you. One of the worst things to do is not filing a tax return at all. That can add a lot more to the taxes already owed. To get copies of Form 9465, visit your local IRS office or call 1-800-829-3676.

5) Married couples with taxable income under $50,000 and without dependents can now use the easiest tax form -- Form 1040EZ. In the past, only single persons could use this easier, green, 10-line form. Other requirements that also apply: you (and your spouse if filing jointly) were not age 65 or older or blind; all income is only from wages, salaries, tips, taxable scholarships and fellowship grants, and taxable interest income of $400 or less; no advance earned income credits were received in 1993; no itemized deductions, adjustments to income, or tax credits can be be taken and no other taxes are owed, other than the amount from the tax table.

Many people try to tell you that you cannot claim a high number of exemptions. You can, but your employer must report that to the IRS. You might get a telephone call from the IRS asking about your number of exemptions. If you do, simply pull out your worksheet and explain why so little tax should be withheld from your paycheck. If it appears during the year that there is underwithholding from your paycheck, you can file another W-4 and have more withheld. Your employer probably won't like it but will have to abide by the new W-4 you file.

7) Estimated tax payments going to be too low? Don't increase them. The tax law says you have to pay your tax bill in equal installments during the year. If you earn more money than expected and your estimated tax payments for the first half of the year are too low, you'll have a penalty for underpaying taxes. A way to avoid this penalty is to increase withholding taxes on your salary as soon as you notice that the estimated taxes won't be enough. The tax law presumes that withholding payments are made evenly throughout the year, even if they weren't. By raising withholding payments long enough to bring your total required prepayments up to the minimum level, you avoid the penalty.

8) Underpayment penalties still can be avoided if your estimated payments don't equal your tax bill. There is no penalty if your estimated payments plus wage withholding are equal to at least 90% of this year's tax liability. You also avoid the penalty if your prepayments at least equal last year's tax bill. So if you are in a period of increasing income, the best way to avoid the estimated tax penalty is to divide last year's tax bill by four and make that the amount of this year's quarterly payments.

A simplified estimated tax schedule is available for high income taxpayers beginning in 1994. A high income individual is someone whose adjusted gross income for the prior year exceeded $150,000 ($75,000 for married filing separately). Such individuals can avoid the penalty for underpayment of estimated taxes if their quarterly estimated tax payments equal at least 110% of the prior year's tax. Other individuals still can avoid the penalty by prepaying either 90% of the current year's tax or 100% of last year's tax.

9) If the underpayment situation is really desperate, but you can come up with the cash within 60 days, a pension plan rollover may save you. With the 20% withholding tax on pension plan rollovers effective January 1, 1993, this technique is brand new. What you do is take enough money out of your plan to have the 20% withholding tax be sufficiently large to cover your tax prepayment shortage. It counts towards your total withholding for the year when you do your tax return. And as long as you pay the pension plan withdrawal (including the 20% that was withheld) into a new plan within 60 days, there is no tax penalty. So what you have is a loan of the withheld money to cover your underpayment penalty. Obviously you may lose a bit of interest on the pension plan with this transaction, but that is going to be a whole lot less than the penalty for underpaying your estimated tax. Just be sure you get the full amount of the money back into a pension plan within 60 days, or you are going to have a much worse problem than the one you started with, because you will then pay income tax on the entire withdrawal and a 10% premature distribution penalty.

Payments to a nursing home qualify as support, as do payments directly to the dependent or to someone providing goods or services to the dependent. Money earned by the dependent does not count as support unless he or she actually spends it on necessities such as food, clothing, shelter, and medical care. If the income is put in a bank or other investments, it doesn't count as support. In addition, tax exempt income such as Social Security income does not count towards the income limit of the personal exemption amount.

Suppose you and your brothers and sisters support a parent jointly, but nobody provides more than 50% of the support. In that case you can sign a multiple support agreement in which you all decide who gets the dependency exemption. Anyone giving more than 10% of the year's support can be assigned the exemption. Everyone who gives more than 10% must join in filing Form 2120 to assign the exemption. You must requalify for and refile the multiple support agreement each year, and the person who is assigned the exemption can change each year.

11) A dependent can earn over $2,450 tax free and still be claimed on your return. When a child is under age 19 or a college student, the gross income limit does not apply. That means the child can earn an unlimited amount of money and still be claimed as your dependent if you provide over one half the child's support. The child is not allowed to claim the personal exemption, if you claim it. But the child can take the standard deduction. The deduction can offset up to $600 of unearned (investment) income, and all of the deduction can offset earned income, such as salaries and wages, up to the standard deduction amount. These dollar amounts are indexed annually for inflation.

12) It is still easy for a self-employed person to deduct a child's allowance. Tax reform puts restrictions on giving income to children under age 14, but the limits don't apply if the child earns the money. You can employ your child in the business and deduct the wages you pay as long as the wages are reasonable payment for the work actually done by the child. The courts have upheld the right of family businesses to employ children as young as six years of age as long as the children do work within their capacities and are paid no more than they would be in an arm's length transaction. The pay is taxable to them. But they will have a lower tax rate than you and can earn over $3,800 annually without paying any taxes. Be certain to keep excellent records of their working hours and the tasks they perform.

13) Income splitting -- the most underused tax angle of all -- gets new life after the 1993 tax changes. Income splitting is when someone in a high tax bracket transfers income-producing property to someone in a lower tax bracket, usually a child or grandchild. That reduces the family's total tax burden.

Income splitting's attractiveness declined after the Tax Reform Act of 1986, when there were only two tax brackets of 15% and 28%. But the 1990 tax law added a 31% bracket, and the 1993 law added 36% and 39.6% brackets. The large difference in tax rates makes income splitting more attractive to higher income taxpayers than it has been in years.

But you must work around the Kiddie Tax to get the benefits of income splitting. When a child under the age of 14 earns investment income, the first $600 is tax-free, protected by the standard deduction. The next $600 (indexed for inflation) is taxed at the 15% rate. But investment income above that amount is taxed at the parent's top marginal tax rate. Or the parent can elect to add the income to his or her own gross income.

Therefore, to get the benefits of income splitting, you should give a child under age 14 property that will produce little or no income until the child turns age 14. This could include real estate, tax-exempt bonds, growth stocks, precious metals, and collectibles. U.S. savings bonds also will defer income. Another option if you have real estate is to put the property in a corporation, then give the child the corporate stock. When the child turns age 14, the corporation can begin to pay dividends or it can elect S corporation status. In those cases, the income will be taxed at the child's tax rate.

With each of these methods you do not have to give the property directly to a young child. The property can be put in a trust or a custodial account under the Uniform Gift to Minors Act. With a custodial account, you or any other adult serves as custodian until the child reaches the age of majority. That means the adult manages the property. But once the child reaches 18 or 21, depending on your state, you have no control over what is done with the money. A trust can keep the child from getting the control until much later. In order to work, the trust must be irrevocable, which means you cannot get the property or income back. It is best that the trustee be someone other than you or your spouse. You also should not have any transactions with the trust, such as getting loans or selling assets. When a large amount of money is at stake, you probably should set up a trust. But for smaller sums the custodial account is better because it is simple and has few overhead costs.

14) Alimony is deductible; child support is not. Be sure your payments qualify as alimony and avoid the new IRS crackdown. Each year about 500,000 taxpayers claim alimony deductions, but only 350,000 report receiving alimony payments as income. Therefore, the IRS has concluded that a number of people are either overstating alimony payments or understating alimony income. New rules became effective in 1985, but they were so complicated that Congress changed the rules again. For divorce and separation agreements after 1986, an alimony payment is deductible if it is paid in cash, is not for child support, and the obligation to make payments terminates on the death of the recipient. Unlike pre-tax reform law, the termination of payments at death need not be explicitly stated in the divorce or separation agreement. A payment is considered to be paid in cash even if it is paid to a third party that provides goods or services instead of being paid directly to the recipient spouse.

Tax reform also revised the "recapture" rules. These revised rules require payments to be spread out in order to be deductible. The payments must be made over at least a three year period. Further, the payments in the first year cannot exceed the average of the second and third year payments plus $15,000. The amount of payments in the second year cannot exceed the third year payments plus $15,000. Any excess alimony payments that were deducted in a prior year must be added to your ordinary income the following year. The purpose of this rule is to ensure that nondeductible property settlements are not disguised as deductible alimony payments. After the third year, payments can be made in whatever amount the parties agree to.

The IRS often will try to recharacterize some alimony payments as nondeductible child support. It can do this in three instances. The first instance is when the separation agreement or divorce decree specifically states that the payment is child support. The second instance is when an alimony payment declines as a result of a particular event happening to the child. The event could include the child's reaching a particular age, getting a job, or graduating from school. The third instance is when the payment declines at a particular time that is clearly associated with an event related to the child. For example, the divorce agreement might state that alimony payments are reduced on June 20, 1995, and it turns out that the child turns 21 during June 1995. The lesson is to be careful about alimony payments that decline over the years. Be sure that there is no implication that the declines are related to changes in your child's life.

15) Child care & dependent expenses still result in major tax reduction. When child care expenses are incurred to enable a taxpayer to work while a dependent is cared for, a tax credit is available. When a taxpayer is a full-time student, the credit is more valuable than a deduction because the credit directly reduces your tax bill. You can get a credit of 20% to 30% (depending on your income) of the first $2,400 you spend on the care of a child under 13 years of age (15 for tax years before 1989). When you have more than one child, the credit is available against up to $4,800 of expenses. But the credit is not allowed for the costs related to a dependent's overnight stay at a camp. If you participate in a dependent care assistance program run by your employer, your qualified child care expenses that are eligible for the credit must be reduced by any benefits received under the employer plan. To protect your child care credit, make sure you have the day care provider fill out form W-10, available from the IRS.

17) Sell your home, but don't move. The tax benefits can be outstanding. When you are over age 55 and sell your principal residence, you can exclude from income up to $125,000 of gain on the home. You must have lived in and owned the home for three of the last five years, though the ownership and residence need not be for the same three years. You can use this provision to sell the home to your children or other family members. The buyers won't need to put up any cash or qualify for a commercial mortgage. The sale can be a private loan to the buyer, installment sale, or private annuity. In any case, you will be receiving regular payments for a period of years or for the rest of your life.

You will have turned your home's equity into cash without moving. You also will have removed the home from your estate and transferred it to your children. The children can let you live in the home rent-free. The fair rental value of the home would be a gift from them to you. An alternative is for the children to charge you fair market rent. If you are charged rent, the children get depreciation deductions and other rental tax breaks. Thus you will have helped them reduce their tax bills. This strategy is extremely flexible and can be adjusted to meet the particular needs of you and your children. (Letter Ruling 8502027). This is a good way for children to put a couple of hundred dollars a month into their parents' hands without tax consequences. All that's needed is for the loan payments to exceed the rent received from the parents and the parents will come out cash ahead. Since the children will be receiving depreciation and other deductions, their tax savings will enable them to afford the difference. This arrangement could be subject to the limitation on "passive" losses, but it should be easy for your children to argue that they are actively managing the property and are entitled to the loss deductions. At any rate, the tax losses probably will not exceed the $25,000 per year limit on passive losses. Beginning in 1994 the rules on passive losses have become more liberal.

18) Double dip with tax exempt bonds. This is another way to use the $125,000 exemption or the provision allowing you to defer gain on the sale of a home by rolling it over into another home. First you sell your home for cash and buy a new home. But you aren't required to use the actual cash proceeds from your old home to buy the new home. You can make a down payment with some of the cash and take out a standard mortgage for the rest of the purchase price. The remainder of your cash can be used to buy tax-exempt bonds. The bonds will pay you tax-exempt income that can be used to make the mortgage payments. In addition, the interest on the mortgage payments will be deductible. The IRS has ruled that this arrangement works. (Letter Ruling 8530024)

19) Help your child buy a home -- with the aid of the tax code. Here are five ways to do it. (1) Give your child the downpayment. Make sure that the gift is less than the annual exclusion, so you won't owe any gift tax. The exclusion is $10,000 per recipient per year, $20,000 if the gift is made jointly with your spouse. If both you and the child are married, you and your spouse can give $20,000 to the child and $20,000 to the spouse for a total of $40,000 gift tax free. (2) Lend your child money to "buy down" the mortgage interest rate. By making an advance deposit with the lender, your child might qualify for, say, a 7% mortgage instead of an 11% rate. This low starting interest rate will eventually rise, but you hope your child's income will also. (3) Buy the home yourself and rent it to your child with an option to buy. This entitles you to deduct cash expenses plus depreciation, provided you charge the child a fair market rent. (4) Your child buys the home but borrows the downpayment from you. On a loan of less than $10,000 you need not charge your child any interest, and on a loan of less than $100,000 you have to charge interest only if your child's net investment income exceeds $1,000. (5) You can enter into an equity sharing arrangement with your child. Each of you puts up part of the downpayment and you take title as co-owners. You each pay a proportionate share of the mortgage installments and upkeep. Your child must also pay rent to you for your share of the house, and you can deduct rental expenses for your share. You also share in the profits if the home goes up in value.

20) If you don't want to leave your home to your kids, a strategy you should not ignore is to give the home to charity. You can take a deduction for this gift now, though you continue to live in the home until you die. Here's how it works. You give the charity what is known as a remainder interest in the home, and you keep a life estate. The home is yours for as long as you live, but at your death the house becomes the charity's property. You take a deduction now for the remainder given to the charity. The size of the deduction is based on mortality tables issued by the IRS. Since the deduction is for the value of the remainder interest, the older you are, the greater the deduction will be. If you are 50, for example, you will be able to deduct about 15% of the home's fair market value. At age 75, you can deduct about 47% of the value. A tax advisor can consult the current IRS tables to determine the exact amount of what your deduction would be.

You might want to use this strategy even if you have children to whom you would ordinarily leave the home. The children might end up with more money overall if you take the charitable deduction now and use the tax savings to buy a single premium whole life insurance policy payable to the children. The policy can be kept out of your estate, and thereby avoid estate taxes. This approach makes sense when the value of the policy is expected to exceed the value of the estate. Since SPWL policies earn market returns and homes in many areas are appreciating at very low rates, this could be a sensible strategy.

The 1993 tax law made this strategy better. In the past, there was a possibility that the alternative minimum tax could take away the tax benefits of this transaction. But the new law eliminates charitable contributions of appreciated property from the alternative minimum tax.

21) Become a landlord before selling and boost your cash flow. This strategy is useful for homeowners in areas with soft or depressed housing markets. If your home is difficult to sell at a decent price, rent the home out while continuing to seek a seller at your price. This will give you cash flow to continue making payments on the house. In the past it was assumed that if you took regular rental deductions such as depreciation, you would not be able to use the $125,000 exclusion or deferral of gain if the home were eventually sold for a profit. But a federal appeals court has ruled that you can get both tax breaks. While renting the home you can depreciate it and get a year or two of tax sheltered income. Then when the home is sold at a gain you can protect that gain. If you plan to use the $125,000 exclusion you cannot rent the home for more than two years because the home must have been your principal residence for three of the five years prior to the sale. In addition, the basis of the home for computing depreciation or capital losses is the lower of your regular basis and the fair market value on the date of conversion. (Regs. Section 1.167(g)ț1;1.1165ț9(b)).

22) Your corporation can build you a house, on your land, then "give" it to you. When you lease land to a tenant, any improvements the tenant makes (including the erection of a new building) become your property tax free when the lease is up. This angle creates an interesting loophole whereby you can purchase raw land and lease it to your corporation. The corporation then builds a house (the kind you happen to like) and rents it to you. The corporation's lease payments to you for the use of the land are deductible to the corporation, and the company can also depreciate the house. Your rental payments for the use of the house are income to the corporation. When the land lease ends (say after 20 years) the land and building are both yours. You need not recognize any income as a result of the improvements the corporation made to your land, and your basis in the house will be zero (because you recognized no income). If you sell the house, all the proceeds will be long term capital gain. If you occupy the house as your residence, you can take advantage of the one-time $125,000 exclusion. On the other hand, if you leave the property to your heirs, the basis to them will be the fair market value at the time of your death, and the capital gain will never be taxed. Do not undertake the leasing arrangements we've described without expert tax and legal advice.

The change in the medical expense deduction is very simple. You can deduct only the unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, and then only if those excess deductions when combined with your itemized expenses exceed the standard deduction. Everything else about the medical expense deduction remains the same.

Miscellaneous deductions had a few more changes. The expenses are deductible only to the extent they exceed 2% of adjusted gross income and the excess when combined with other itemized deductions exceeds the standard deduction. In addition, some expenses that could be deducted in the past can no longer be deducted. The expenses for attending an investment convention or seminar are not deductible. Travel for educational purposes is not deductible, so school teachers can no longer deduct the cost of a summer vacation that was spent in some way related to the courses they teach.

The biggest change is that unreimbursed employee business expenses become miscellaneous itemized deductions. In the past most unreimbursed employee expenses could be deducted from adjusted gross income. You didn't have to worry about whether you had enough itemized deductions or about getting above a 2% floor. That's no longer true. Items such as travel and entertainment expenses and business mileage must be included in miscellaneous itemized deductions. So now instead of having two separate categories of deductions, there is only the deduction for miscellaneous expenses. In addition, business entertainment expense deductions are limited to 50% of the cash outlay, and the "quiet business meal" exception is eliminated. Under this exemption, a meal could be deducted even if business was not actually discussed. Now there must be a bona fide business discussion either during the entertainment or immediately before or after it for the expense to be deductible.

Some specialized miscellaneous expenses are deductible without regard to the 2% floor. These expenses are impairment-related work expenses of the handicapped; estate taxes related to income in respect of a decedent; certain adjustments where a taxpayer restores amounts held under a claim of right; amortizable bond premiums; certain costs of cooperative housing corporations; expenses of short sales in the nature of interest; certain terminated annuity payments; and gambling losses to the extent of gambling winnings. Some actors can report their income and expenses as independent contractors instead of employers. These actors are those who have two or more employers in the acting profession during the year, whose expenses related to acting exceed 10% of gross income, and whose adjusted gross income before deducting expenses related to acting exceeds $16,000.

There are a number of actions you can take to avoid the onerous effects that these changes were intended to create.

24) As with medical expenses, a key concept to maximizing miscellaneous expense deductions is bunching. You want to put as many expenses as possible in one year. Since miscellaneous expenses are far more discretionary than medical expenses, this is much easier to do. Probably the only good reason for failing to do so is cash flow problems.

Here are some examples of how bunching should work. Let's say you're an employee and have been subscribing to professional publications, paying dues, running up some unreimbursed business mileage, and buying some job-related equipment. You also attend a professional convention once a year at your own expense. You're used to deducting the mileage and equipment for adjusted gross income and taking the other items as itemized deductions. Now all these expenses have to be itemized and are deductible only to the extent they total more than 2% of adjusted gross income.

There are a couple of approaches you can try. One is to pay for subscriptions and dues two years in advance and make all the payments in the same year. Then you will have large expenses one year and no expenses the next year. This increases the amount of deductions you'll have above the 2% floor. But the IRS has issued a press release saying that this strategy does not work. The IRS says that when you pay for more than 12 months at a time, the payments must be prorated over two taxable years. Fortunately, there is a way to comply with the IRS ruling and still bunch miscellaneous deductions. You can make one year of payments for everything in January, then pay for the next 12 months during the following December. For example, pay for 1989 subscriptions and dues in January 1989, then pay for 1990 in December 1989. That way you will have two years of payments in one year but the deductions qualify under the rules given in the IRS press release.

25) Part of the cost of securing a divorce can be a miscellaneous deduction. You cannot deduct the cost of a personal legal action, such as securing a divorce. But part of the divorce process can be deductible. Each spouse can also deduct any fees attributable to tax advice and planning. The cost of keeping or obtaining property as part of a property settlement is not deductible but can be added to the property's basis. Most likely part of the cost of a divorce will be deductible and part will not be. Key point: Have your lawyer and other advisors submit itemized bills in which they set out the time spent on deductible and nondeductible matters.

26) Some lucky taxpayers can deduct the cost of commuting to work. Take the case of a taxpayer whose principal place of business is a home office. Any business trip you make from that office is deductible business mileage, even if the trip is to another office or place where you work. The key is that the home office must be your principal place of business for that occupation (you can have two jobs), the place where you do most of your work. Commuting mileage also can be deducted when you are away from home on a temporary work assignment. A temporary assignment is one that you know will not last indefinitely, and under the 1993 law, does not last more than one year. When you are out of town on a temporary job, all your mileage is deductiblețincluding mileage from your lodging to your place of business. Commuting mileage also is deductible when you have a temporary work assignment out of town but decide to drive back and forth from your home each day.

An individual with two jobs also will have deductible commuting mileage. You cannot deduct the cost of going from either job to home, but the cost of going from one job to the other is deductible mileage. So it pays you not to stop off at home between the two jobs. Another person with deductible commuting mileage is the person with businesses in two different areas. The area where you spend most of your time will be your principal place of business. The other area will be considered away-from-home travel. You deduct not only the cost of going there, but the mileage you drive while at the second location.

27) The IRS in drafting its forms and instructions tends not to emphasize miscellaneous expenses. That leaves many people unaware of just now broad this category is. You can deduct any expense you incurred in the production of income or for investment purposes. You just have to be able to distinguish those expenses from personal expenses.

28) Deduct your expressions of sympathy? Flowers and other sympathy gifts are deductible only if there is a business connection. However, you can always deduct a charitable contribution given in memory of a deceased person, whether there is a business tie-in or not, if you itemize deductions. And the family often appreciates this more than a gift.

29) Noncash donations to charity are an easy way to boost deductions. Gather up old clothes, unwanted books, junk furniture, and any other items you can find. Then take them to a worthy group. You get a deduction for the fair market value of the items at the time of the contribution. Be sure to get a receipt for the items from the charity. Some organizations will put an estimate of fair market value on the receipt, while others will not. Documentation is important for these transactions. If the deduction is over $500 you definitely need receipts. If the property is worth over $5,000 you need to have it appraised before taking the deduction.

30) Give appreciated property to charity instead of cash. Suppose you plan to make a large gift to your church or some other charity. You own some art which has appreciated substantially since you bought it. You could sell the property, pay tax on the gain, and give the remaining cash to the charity. But you could also donate the art to the charity. In that case you deduct the fair market value of the art and do not have to pay any tax on the appreciation in the art's value. But if the art, or the total value of your charitable gifts for the year, exceeds $5,000 in value, you must have an appraisal of the property done. The appraisal must be signed by both the appraiser and the charity and must be attached to your tax return.

This strategy is even better after the 1993 tax law, because Congress eliminated the possibility that giving away appreciated property might trigger the alternative minimum tax.

31) Casualty loss deductions are still available if you avoid the three traps the IRS likes to use. The first trap is that you must claim the deduction in the year the loss occurs, even if the amount of the loss is not ascertainable. This is a trap because the deduction can be deferred when you cannot yet determine if a loss has occurred. The difference may seem slight, but it can have a big effect on your tax bill. Suppose a deep freeze does damage to your trees. A landscape gardener says he might be able to save the trees, so you cannot determine yet if any loss has occurred. The deduction can be delayed until a subsequent year when it is clear that the trees cannot be saved. In a recent case a taxpayer tried to apply this rule. The taxpayer's driveway was washed away in a thunderstorm. At the time the return was filed, the taxpayer believed the amount of the damage could not be determined because several contractors disagreed over how much repair work would be required. But a federal appeals court said the deduction should have been taken in the year of the thunderstorm. A loss clearly had occurred, the question was how much the loss was. The taxpayer should have estimated the loss and deducted it; if the estimate turned out to be wrong, the return could be amended. (Allen, 4th Cir., 9/9/85)

The second trap is related to the first. The taxpayer thought the amount of the loss could not be determined because he thought the cost of the repairs would be deductible. That's wrong. Your deduction is the lower of (1) your basis in the property or, (2) the reduction in value due to the casualty. Your replacement or repair cost is irrelevant. That's one reason why it is important to keep your property and casualty insurance policies up to date. If an item has appreciated substantially above its cost to you, the tax deduction won't help you recover the value if it is lost or stolen. Your deduction will be limited to the item's cost. In any case, casualty losses can be deducted only to the extent they exceed 10% of adjusted gross income.

The third trap was created by tax reform. In order to claim a casualty loss deduction, you have to file an insurance claim if the property was covered by insurance. Only the amount of your unreimbursed loss can be deducted. If you do not get a reimbursement from the insurer until after you already took the full deduction, you can file an amended return or include the reimbursement in income next year.

32) Taking a new job can boost your itemized deductions. Most people don't realize that the expenses of looking for a new job in the same field are deductible. The deductible expenses include everything from printing up resumes to visiting out-of-town firms. The expenses are deductible even if you eventually decide not to take another job, as long as you were seriously considering a new job. The expenses are not deductible, however, if you are looking for your first job. These expenses can really add to your miscellaneous deductions, so you should maximize other miscellaneous expenses in a year when you decide to look for another job.

33) The family vacation can still generate deductions. If you can combine a business trip with a short vacation, part of the vacation costs can be deductible. Your transportation expense (the cost of getting from here to there and back) is deductible if the primary purpose of making the trip is business. So your transportation cost is deductible when you made the trip because of a convention or an important business meeting. It is best to spend more than half the trip on business, but your transportation will be deductible when you can show that the trip would have been made even if no vacation were possible.

Traveling expenses for your spouse and other family members generally cannot be deducted. After 1993, traveling expenses of a spouse or dependent or deductible only when the individual is employed by the taxpayer paying the expenses and there is a bona fide business reason for the person's presence on the trip.

34) Moving expenses can be easier to take under latest change. Previously, moving expenses were an itemized deduction. If you used the standard deduction you were out of luck. After 1993, qualified moving expenses can be deducted directly from gross income. Even better, if your employer reimburses you for qualified moving expenses, the reimbursement is tax free. The trade off is that not as many expenses qualify for deductions as before. You no longer can deduct househunting trips or meals consumed while traveling to the new home or living in temporary quarters. Also, the new place of work must be at least 50 miles farther from the old residence than the old residence was from the old place of work. You can deduct the cost of moving household goods and the cost of traveling from the old home to the new home.

35) There are quite a large number of miscellaneous expenses. Here is a list of the most commonly overlooked deductions.

• Accounting fees for investment or tax work
• Agency fees paid to get a new job
• Books used for employment or investment purposes
• Auto expenses or taxi fares to visit your broker or other advisor
• Christmas gifts given to customers or clients
• Clothing and uniforms needed on the job
• Conventions
• Correspondence courses
• Dues and fees for organizations related to employment or investments
• Educational expenses
• Entertainment expenses
• Fees paid for collection of interest and dividends
• Fees paid to set up or administer an IRA
• Home office expenses
• Investment management fees
• Local transportation related to the job
• Medical exams required for the job
• Passport fees for business travel
• Periodicals and publications related to job or investments
• Safe deposit box used to store investments
• Supplies and equipment used on the job
• Tax return preparation fees
• Telephone calls made on personal phone or credit card
• Tools used on the job
• Travel costs to look after or investigate investments, if reasonable compared to size of investments
• Union dues

37) Credit cards are not all alike for the purpose of tax deductions. Around the end of the year, the newspapers and popular magazines like to tell readers that using a credit card near the end of the year can be a way to take a tax deduction this year and pay the bill next year. This works for any deductible expense -- whether it be a personal prescription or a business expense. The angle is that the charge can be deducted in the year it is charged, not the year it is paid. But there is a dangerous hole in the popular advice can leave you stuck with a big tax mess. Credit card deductions are not all the same under the tax rules. The general rule of tax deductions is that you only get a tax deduction in the year you actually pay for a deductible expense, and the tip about using credit cards is an exception to the general rule. What most of the people giving you this end of the year tip don't tell you is that there is a critical exception to the exception. If you charge a deductible expense on a credit card issued by the company supplying the deductible goods or services, you can't take a deduction until the credit card bill is paid. If you use the store credit card you can't deduct it until you pay. But if you use your Visa or MasterCard you can take the deduction immediately. If you use your credit card you can take the deduction this year, but if the store bills you directly you can't take the deduction until you pay the bill. Keep this in mind near the end of the year, when you may want to choose which card you use depending upon which year you want to take the tax deduction in.

When emergency care and necessary surgery occur, you can do little to change the timing. But you can influence elective surgery and continuing care expenses. The first step is to determine how likely you are to exceed the 7.5% floor this year. If you are unlikely to exceed it, then you want to defer whatever payments you can. Put off any elective treatments and when possible avoid paying bills until after December 31st. In a year where you are likely to exceed the floor, you want to pay all the expenses that you've been deferring or considering.

For instance, if there is an elective surgery that you've been considering, have it done only in a year when you think the floor will be surpassed. When you pay for long-term care such as a nursing home, try to prepay for two years at a time or whatever you can afford. If you visit a doctor in December, be sure the bill is paid by December 31st. Most importantly, examine this report thoroughly for deductible expenses that you might have overlooked.

With bunching, you generally adopt a two-year strategy. One year you pay all the expenses you can and take the deductions. The following year, unless unexpected expenses come up, you pay only the expenses that must be paid because you probably won't exceed the 7.5% floor for deductions.

39) One way around the floor on medical expense deductions is to reclassify your medical expenses as something else. For instance, if a nurse must be hired to look after your spouse or a dependent so you can go to work, consider taking the dependent care credit instead of the medical expense deduction. When an attendant is needed to take you to work or accompany you on business trips, you should try deducting the cost as a business expense. In one case a psychiatrist was encouraged by the directors of his residency program to undergo psychotherapy. They said the treatment would not only solve his personal problems but would make him a better psychiatrist. Rather than treating the cost as a medical expense, the doctor chose to treat it as a business education expense, and the Tax Court agreed. (Porter, 86 TC No. 13 (Feb. 13, 1986)).

40) You can pay your parents' medical expenses with their cash and take the deductions yourself. If your parent makes an unconditional gift to you, the money is then yours. It is not taxable income. You can use that money however you want to, and if you want to pay your parents' medical bills that's fine. You'll be paying the expenses with your money. When the parent is your dependent, you can take the medical expense deduction. One taxpayer got a power of attorney from the parent and shifted funds from the parent's account to his whenever bills had to be paid. After the money was deposited in the son's checking account, it became his. He paid the medical bills and was entitled to deduct the expenses. An important point is that the money must be transferred to your personal checking account before the bills are paid.

41) The cost of a health club membership can be deductible. The way not to get the deduction is to claim that your employer requires you to stay in excellent physical shape, as a police officer found out. (Revenue Ruling 78-128). But you can get the deduction if the membership is prescribed by your doctor to treat a specific physical ailment, such as high blood pressure or arthritis or to rehabilitate an injured body part. Get the doctor's order in writing and don't be buffaloed by IRS employees who try to tell you it's not deductible. But note that the membership must be part of the treatment for a specific problem. If the doctor orders you to lose weight or improve your overall physical condition, it is not a deductible expense.

42) All or part of the cost of a nursing home can be deductible. If a principal reason for placing someone in the nursing home is to obtain full-time medical care, the entire cost of the home is deductible. (Reg. Sec. 1.213-1(e)(1)(v)(a)). Even when you don't meet this test, you can still deduct the portion of nursing home expenses related to medical care. The nursing home should be able to give you an itemized breakdown of the portion of the cost that is related to medical care or provide an estimate that will be acceptable to the IRS. If you pay the expenses on behalf of someone who is dependent, the expenses are deductible to you. But if you make a lump sum payment for lifetime care, the expense cannot all be deducted in the year of payment. It must be deducted equally over the expected lifetime or some other period.

43) Personal mileage related to medical care is deductible. Your mileage incurred on trips to and from your doctor's office or other place you receive medical care are deductible miles. The trip must be essentially and primarily for medical care. (Reg. Sec. 1.213-1(e)(l)(iv)). You can take the standard mileage rate of nine cents per mile or deduct actual expenses. With these trips you cannot deduct depreciation and repairs, as you can for business mileage. That's why the mileage rate is lower than the business standard mileage rate. Any rides you give to a dependent that are related to medical care are deductible.

44) Overnight lodging can be a deductible medical expense. When a trip is taken primarily for medical care and is essential to the care, you can deduct the cost of overnight lodging. The medical care must be performed by a physician at a licensed hospital or equivalent medical care facility. If the medical care is for a dependent and your presence is needed to approve operations or for some other reason, the cost of your lodging is deductible. The deduction is limited to $50 per night, and meals are not deductible.

45) Don't miss out on these little-known medical expenses. Many taxpayers are incurring deductible expenses without knowing it. Here is a list of the deductible expenses and the authority for deducting them.

• Acupuncture (Revenue Ruling 72-593)
• Air conditioner required for allergy relief (Revenue Rulings 55-261 and 68-212)
• Alcoholism treatment (Revenue Ruling 73-325)
• Attendant to accompany blind child (Revenue Ruling 64-173)
• Braille publications, to extent cost exceeds cost of regular editions (Revenue Ruling 75-138)
• Capital improvement to property when primary purpose is medical care (Examples: swimming pool, air conditioning. Deductible only to extent cost exceeds increase in value of the property.) (Reg. Sec. 1.213-1(e)(iii)).
• Chiropractors (Revenue Ruling 63-91)
• Christian Science treatment (Special Ruling 2-2- 43)
• Clarinet lessons to alleviate dental malocclusion (Revenue Ruling 62-210)
• Contact lenses (Revenue Ruling 74-429) Contraceptives by prescription (Revenue Ruling 73-200)
• Cosmetic Surgery, if medically necessary (Revenue Ruling 74-429)
• Dental Work (Reg. Sec. 1.213-1(e)(i))
• Domestic aid, such as nursing care (Revenue Ruling 58-339)
• Drug addiction recovery (Revenue Ruling 72-226)
• Prescription drugs (Internal Revenue Code Section 213(b))
• Educational aids for blind student (Revenue Ruling 58-223)
• Electrolysis (Revenue Ruling 82-111)
• Elevator (so cardiac patient won't have to climb stairs) (Revenue Ruling 59-411)
• Halfway house (Letter Ruling 7714016)
• Hearing aids (including specially equipped telephone, closed caption television decoder, and visual alert system) (Revenue Rulings 73-189, 80-340 and Letter Ruling 8250040)
• Indian medicine man (Tso, 40 TCM 1277)
• Insurance (Reg. Sec. 1.213-1 (e)(2))
• Lead paint removal (Revenue Ruling 79-66)
• Lifetime medical care, prepaid (Revenue Ruling 75-302)
• Lip reading lessons for the deaf (Revenue Ruling 58-280)
• Mattress to alleviate arthritis (Revenue Ruling 68-212)
• Notetaker for deaf student (Baer Estate, 26 TCM 170)
• Orthodontia (Reg. Sec. 1.213-1(e)(1)(ii))
• Patterning exercises for handicapped child (Revenue Ruling 70-170)
• Psychiatric care (Revenue Ruling 55-261)
• Schooling, for special relief of handicap (Revenue Ruling 70-285)
• Sexual dysfunction (Revenue Ruling 75-187)
• Swimming pool (for treatment of polio) (Letter Ruling 8208128)
• Taxi to doctor's office (Revenue Ruling 68-212)
• Transplant, donor's costs (Revenue Ruling 68- 452)
• Wig (Revenue Ruling 62-189)

Mutual fund shares also can be earmarked in writing when they are sold. But the results are a little different if you do not earmark the shares. Instead of the first-in, first-out method, you use an averaging method to determine the basis of your shares. You add up the cash you've invested plus dividend reinvestments, and divide that by the number of shares you owned before the sale. The result is the basis for each share sold. By using this method, you lose the ability to influence the amount of your gain or loss for tax purposes.

47) You can earn interest and dividends tax free. Many taxpayers with high investment income can control whether or not they pay taxes on that income. One of the few interest deductions left after 1990 is the deduction for investment interest expense to the extent of net investment income. Suppose you have investment income, such as interest and dividends, of $10,000 for the year. This is included in Schedule B and added to your gross income. If you itemize deductions and paid $10,000 of investment interest, the investment interest expense deduction offsets the investment income. This means that if you can generate investment interest expenses, you can shelter the investment income from taxation. The deduction for investment interest also is not subject to the new itemized deduction reduction. Any investment expense that you cannot deduct because the interest expense for the year exceeds net investment income can be carried forward to future years.

Net investment income is investment income minus directly connected noninterest expenses, such as investment counsel fees, accounting expenses, insurance, subscriptions, and legal expenses. Investment income includes interest, dividends, royalties, rents from net lease property, and amounts recaptured as ordinary income. Investment interest includes interest incurred to purchase or carry investment property, other than tax exempt bonds and insurance policies. Margin account interest is the usual source of investment interest expenses. Interest on rental properties that qualify as passive activities does not count as investment interest. But in most cases interest on debt incurred to purchase undeveloped real estate counts as investment interest and shields investment income. Another approach: Instead of buying a consumer item such as a car with debt and purchasing stocks for full price, pay cash for the car and buy the stocks on margin. You should consider factors other than taxes, but when only taxes are considered you come out ahead with this strategy.

Capital gains used to be included in net investment income. But the 1993 tax law eliminated that in most cases. You can, however, elect to include capital gains in your net investment income if you agree that your net long term capital gains will be taxed at your regular income tax rate instead of having a 28% cap. This can be an advantage if your regular tax bracket is 28% or 31% anyway. It can also be an advantage if your investment interest is high enough to shelter most of the capital gains from tax.

Remember that any unused investment expense can be carried forward to future years. So if you expect a lot of interest and dividend income in the future, it might be better to take the 28% rate against your capital gains and let the investment interest expense carry forward to shelter the other investment income.

48) Upgrade your insurance policy and get favored tax treatment. New insurance policies provide investment and tax benefits that are far superior to older whole life insurance policies. Some policyholders are afraid that if they cash in their old policies they will have to pay taxes on the accumulated earnings of the cash value. That's not true. The tax code allows you to exchange insurance policies tax free. You can exchange life insurance for life insurance, an endowment contract for another endowment or annuity contract, and an annuity for another annuity. All these exchanges are tax free whether or not the policies are with the same company. Many insurance companies have programs that allow you to trade in the policy of a different insurer when you take out a new policy. A recent Tax Court case makes the exchange even easier. The taxpayer's old insurer refused to transfer the cash value of her old annuity to the new insurance company selected by the taxpayer. Instead, the old insurer issued a check to the taxpayer, and the check was immediately reinvested in the new annuity. The IRS claimed that there was income when the check was received because the taxpayer was not bound to reinvest it. The Tax Court disagreed. It said that the tax-free exchange provision is to be broadly interpreted. You can cash in your old policy and use the proceeds to buy a new policy immediately. (Green, 85 TC No. 59 (1985).

56) Don't improve rental properties, repair them. An improvement to a property is considered a capital expenditure. You cannot deduct the expense, but have to add it to the property's basis and depreciate it. A repair expense, however, can be deducted immediately. The difference between a repair and an improvement is a fine one, and often requires careful planning. A repair maintains the current value or useful life, while an improvement increases value or lengthens useful life. The key is to avoid bunching repairs together. When a large number of repairs are done at one time, even if they are unrelated, all the work will be lumped together and called a major renovation. You can avoid this treatment by having work done over a period of more than one year, using different contractors for the work, and not drawing up a single bid, blueprint, or contract for the combined work. Treat each job as a separate repair, and do all you can to make outsiders (such as the IRS) think they are separate projects. A file of tenant complaint letters requesting specific repairs can be very helpful -- don't throw such notes away after the repairs are completed.

57) You might not be saving money by doing repair and renovation work yourself. Usually these costs can be added to a property's basis. This increases your depreciation deductions and later decreases your gain on the property's sale. But the value of any personal labor you put into the work cannot be added to the basis. This is true even if you do that type of work for a living and can establish what the fair market value of your labor is.

58) Believe it or not, there are ways to "depreciate" land. Generally only wasting assets can be depreciated, and land is not considered a wasting asset. It doesn't wear out over time. So when you buy business or investment property, the cost of the land and buildings must be separated. The buildings are depreciated, and the land is not. But one way to get the same result as depreciating land is to buy the buildings and lease the underlying land. The rent payments you make on the land will be deductible. If the property seller doesn't want to lease land, that's no problem. Many banks are happy to step in and buy the land and immediately lease it to you. Of course, you will want a long-term lease on the land to ensure that you won't lose the lease when you still want to use the buildings. You'll also want the rent to be adjusted according to some fixed standard, because you would be at the landlord's mercy otherwise.

59) Another option is to buy an "estate for years" in the land. The owner of an estate for years essentially is the owner of a piece of property but only for the number of years stated in the deed. After that, the property reverts to the original owner. Under the tax law, the cost of an estate for years can be written off over the life of the estate. It's possible that your bank or a corporation formed by you can buy the remainder interest in the land so that the property will not revert to an unrelated third party when the estate for years expires. The estate for years can be tricky to execute. Your tax advisor should read the case of Lomas Santa Fe, Inc., 74 TC 662, before the deal is set up.

60) Real estate sellers should consider leasing instead of selling their properties. Instead of an installment sale, make a long-term lease with an option to buy. The difference in your cash flow from the "buyer" will be nominal, if anything, but the difference in your tax situation could be dramatic. The lease income will be considered passive income if things are structured properly. That means losses from your other properties will offset the lease income. Instead of capital gain, you have ordinary income that is sheltered by the other properties. The distinction between a lease and a sale is a technical one, and depends on many fine distinctions. You should not attempt this on your own. Instead, your tax advisor should read Frank Lyon & Co. v. U.S. (435 US 561 (1978)) and structure the deal for you.

61) Business start-up expenses are deductible if you play it smart. The key is that you must actually be in the business and ready to serve customers or clients before the expenses can be deductible. Any expenses you incur while preparing to enter a business must be capitalized. So you should delay significant expenses for as long as possible. If feasible, hold yourself out as ready to serve customers before all the expenses have been incurred. There is another option for unincorporated businesses that cannot wait to incur their start-up expenses. The proprietors can try deducting the start-up expenses as miscellaneous itemized deductions incurred for the production of income. There haven't been many cases on this treatment yet, but some tax advisors and the Tax Court believe the deduction is proper.

62) Your business's income goes up, but the tax rate drops. All it takes is a little planning. Suppose you are ready to introduce a new product or expand the scope of your business. You could do what most people do, and simply grow normally through your own corporation. Or you could form another corporation, being sure that more than 20% of the stock is transferred to a third party who does not own stock in the old corporation. You'll want to do this when the corporation is financed by a new investor or when one or more employees will be key to its success. Give them stock in the corporation. When you do this, the corporation will be taxed separately. It will not be grouped with the other corporation for tax purposes the way it would if the same people owned more than 80% of both corporations. The result is lower taxes and more money for everyone. Corporate income under $75,000 is taxed at less than the maximum rate.

63) Business owners should have their businesses pay the medical expenses. The best way to do this probably is by establishing a medical reimbursement plan. The firm sets a policy under which it will reimburse employees for medical expenses. You can set limits on the amount that will be reimbursed and the types of care that will be covered. The key is that full-time employees must be treated equally. When an employee incurs an expense, documentation is given to the firm and the expense is reimbursed according to the plan. The firm can buy a health insurance policy that will cover all or most of the expenses, and use its own cash to cover any expenses not paid for by the policy. The medical reimbursements are not taxable to the employees as long as the plan is nondiscriminatory and reimbursements do not exceed expenses.

64) Sometimes it makes sense to put different business operations in separate corporations. In the 1970s multiple corporations allowed the owner many tax advantages, including multiple pension plans. But now corporations that are 85% or more owned by related individuals are grouped into one corporation in most cases. But at times it still pays to place business operations in separate corporations. When the businesses are in different states, multiple corporations ensure that profits are not hit with taxes from more than one state. Multiple corporations give the owner more flexibility in estate planning or when trying to sell one operation with a minimal tax bite. Splitting operations also qualifies each business for several advantages that are available only to small businesses, such as the section 1244 ordinary loss deduction for corporate stock that becomes worthless. Also the different businesses generally can select different accounting methods and tax years.

Multiple corporations do have nontax advantages as well. The debts and other legal liabilities of one business will have no effect on the assets of another business. This is important when you have a prosperous business and plan to start a riskier one. When a large number of employees are involved, separate corporations make stock ownership incentive plans more effective. Employees feel that their individual efforts will have a more direct effect on the bottom line. If there are labor problems, such as strikes, multiple corporations ensure that the dissatisfaction of one group of employees won't affect the other business. When considering multiple corporations, be sure to balance these advantages against the disadvantages of additional bookkeeping, tax returns, and other administrative work.

74) Your business can increase the Social Security benefits your non-working spouse eventually receives. A surviving spouse with lifetime earnings that aren't substantial enough to trigger Social Security payments will receive between 37 1/2% and 50% of the working spouse's retirement payments. But suppose you make your spouse a partner in the business right now. There would be little or no effect on your current federal income taxes, but your spouse as a partner would now have self-employment income. That income would count towards establishing your spouse's independent Social Security retirement payment to supplement yours. This strategy could result in increased self-employment taxes now since both you and the spouse could be liable for the maximum payment. This treatment can be reduced by making the spouse a less than 50% partner and by continuing the partnership only long enough to qualify for the maximum Social Security payout. But you might find that increased self-employment taxes now are worth what might eventually be received in Social Security benefits.

75) You can still borrow now to fund your IRA. The final tax overhaul package allows this. You can either get a personal loan or an advance against your credit card. The money then can be deposited in an IRA, and the deduction can be taken if you qualify for it. In addition, the interest charged is an investment interest expense, which means it is deductible to the extent of your investment income. Interest that you cannot deduct this year is carried into future years until you have enough investment income to offset it.

76) "Paired" retirement plans maximize your benefits. A small business owner can maximize benefits and protect cash flow by pairing two retirement plans.

The best approach for a business is to start with a profit sharing plan. This plan does not require annual contributions. So you can make a large contribution to the plan in a good year and make a lower or no contribution in bad years. The maximum contribution is the lower of 15% of salary or $30,000 per employee.

When cash flow becomes more predictable or seems to have a floor, you can set up a defined contribution plan. This requires you to make an annual contribution. You set the amount of the annual contribution when you create the plan by stating the percentage of salary that will be contributed per employee. It can range up to 25% of salary or $30,000, whichever is less.

Many business owners find the ideal pairing is to set up a defined contribution plan with a contribution rate of about 10% of salary. Then additional contributions of up to 15% of salary can be made to the profit sharing plan. So in the best years 25% of salary will go into the retirement plan. But in bad years the business is obligated to contribute only 10% of salary. You can set a lower figure for the defined contribution plan if you think there might be years when meeting the 10% figure will be tough.

By pairing retirement plans you ensure maximum contributions in the good years and allow the business flexibility for years when cash is tight.

77) Smaller businesses can get the benefits of pension plans without the high costs. You are allowed to set up a Simplified Employee Pension Plan. A SEP is simply an IRA account to which the employer makes contributions according to a written formula. The contributions must comply with the nondiscrimination rules. The employee is allowed to make whatever regular IRA contribution he or she would still be eligible for.

In addition to relaxed maintenance and reporting requirements, an advantage of a SEP is that the employer does not have to make annual contributions. The contributions are made when the employer chooses, but when made they must be according to a formula that does not improperly discriminate among employees. A disadvantage is that when an employee eventually takes money from the SEP, the distributions do not qualify for the five-year averaging allowed lump sum distributions from regular pension accounts. But this should not be considered a great disadvantage since lump sum benefits generally are rolled over into an IRA, and that puts the benefits on an equal footing with SEP benefits.

78) Some gold and silver investments can be included in IRAs. The 1981 law prohibited IRAs from investing in collectibles and precious metals. But the tax reform plan says that your IRA can purchase the new gold and silver bullion coins minted by the United States. You still cannot put other forms of gold or silver or other collectibles in your IRA. (The GoldPlan in idea #48 can be included in IRAs.)

79) U.S. law requires that assets in pension plans be physically held by a trustee in the United States. For two products -- foreign currency certificates of deposit and Swiss annuities -- a service is available that will let you place these products in your U.S. IRA or pension account.

Asset Strategies International of Rockville, Maryland, using the services of the venerable Delaware Charter Guarantee and Trust Company, can provide the required custody and accounting services. Delaware Charter was founded in 1899 and now manages over US$8.5 billion in trust assets, the largest of any non-deposit U.S. trust company. However, they will not offer their services directly, but only through intermediaries.

Michael Checkan and Glen Kirsch of Asset Strategies International provide a service in which they handle all the year-end currency conversion accounting required by IRS rules, and Delaware Charter compiles the annual reports to the IRS. They are well known in the financial newsletter industry and at one time or another have been recognized as a "recommended vendor" by many of the writers in the newsletter industry. The principals, Michael Checkan and Glen Kirsch have been in the foreign exchange business for a combined total of 50 years.

For further information write to:

Asset Strategies International Inc.

Suite 400A

1700 Rockville Pike

Rockville MD 20852

81) You don't always want to continue negotiating with the IRS and challenging audit results. Usually this is a good idea, because the Appeals Office is more reasonable than the auditors. They settle about 85% of their cases, and most of those cases result in some reduction of the amount owed by the taxpayer. But you don't want to do this if the auditor missed something questionable on your return, because the Appeals Office looks at the entire return. When you have something to hide but also believe that the audit results should be appealed, simply ask the IRS to issue a notice of deficiency after the audit. That allows you to appeal to the Tax Court within 90 days. (You also can do nothing for 30 days after the audit results are received; then you'll receive a notice of deficiency automatically.)

82) Persistence pays when discussing your tax return with the IRS. An auditor is to meet with a taxpayer before issuing a report. The idea is to reach an audit result that you will consent to, since this holds down costs by keeping the case out of the Appeals Office. But the auditor also has a time deadline. Cases have to be processed at a certain rate, and the agent cannot spend too much time on your case. This can operate in your favor if you refuse to leave the conference until the auditor gives in on one or more of your points. Simply make your arguments, let the auditor respond, shift the conversation to another topic, then come back to your points again. Persist in this manner until the auditor finally gives in or announces that the conference is over. Most of the time the auditor will give in.

83) When you can't pay your taxes, get a 60-day loan. If you don't have the money to pay, file a return anyway. After a while the IRS will contact you about the unpaid taxes. Respond immediately. You can simply call the employee designated in the letter sent to you. The employee will tell you how important it is to pay the bill, but he or she will not tell you that a 60-day installment loan is yours for the asking. IRS policy is not to publicize this program, but any taxpayer qualifies for it. All you do is tell the IRS employee that you can have the money within 60 days and want an installment agreement. The employee will try to get you to agree to a shorter payment period but will accept 60 days if you insist that's the best you can do. There is no credit check or other investigation. You get the 60 days if you ask for them. Of course interest is charged during this period, so it is to your benefit to pay the bill as soon as possible. In addition, be sure that you make the payment within the agreed time period. If you do not meet the payment schedule, the collection division will accelerate its collection efforts.

84) What's the best time to schedule an audit? Near the end of the month is good. Auditors have rather strict quotas to meet. If your auditor has not closed enough cases for the month, there is an incentive to do your audit quickly to get it closed by the end of the month. If there is a three-day weekend coming up, the Friday before it starts could be even better. The auditor is likely to be distracted by plans for the weekend and may not examine your return as closely. There also could be a rush to get the audit done and get an early start on the long weekend. The best time of day to schedule the audit is around ten in the morning. Then you're reasonably sure that lunch plans will keep the meeting from dragging on. The threat of missing or being late for a lunch date also could cause the agent to hurriedly make some concessions that he wouldn't ordinarily make.

85) When you're in a dispute with the IRS and plan to go to court, you don't have to let interest expenses mount. If you lose the case, interest is charged on your overdue taxes. One way to avoid this is to write a check to the IRS and label it as a deposit or cash bond. This stops the interest from accumulating. If the IRS decides you are wrong and issues you a notice of deficiency, you can still take the case to Tax Court. Should you lose the case, the IRS keeps the money; if you win, the money is returned without interest. But if you fail to label the payment properly, as a deposit or bond, it will be considered a payment of the taxes in dispute and no notice of deficiency will be issued. You will not be able to go to Tax Court.

86) You haven't reached an agreement with the IRS until the proper officials sign it. IRS employees often negotiate settlements and compromise with taxpayers, but they do not have authority to bind the IRS. The agreement has to be signed by officials higher up after you sign it. So don't rest easy until you are notified that the settlement has been signed. Sometimes a higher-level official rules that the lower-level employee gave away too much. In those instances, taxpayers who thought they had settlements are surprised to find notices of deficiency in their mailboxes. Ask the employee when the agreement should be approved and when you should receive word of it. Follow up with a telephone call if too much time passes without your hearing anything.

87) When it seems the IRS isn't listening to your problems, there are several steps that can be taken. First you should realize that the IRS is still having problems with its new computer system, and you should expect delays and foul-ups. Also, lower morale apparently has increased turnover at the IRS, so there are fewer experienced people to handle your problem. The 1986 tax reform bill included substantial increased funding for the IRS over five years, but as of 1990 the IRS had not yet hired and trained enough employees to ease the backlog. Whether or not you think the government ought to be run this way, you'll have to accept the fact that it is being run this way. Second, you should consider whether you really want the problem handled quickly. It is always uncomfortable to have an unresolved tax issue hanging over you, particularly if a lot of money is at stake. But many advisors believe that by waiting you can work the IRS's high turnover to your advantage. There is a feeling that an agent who gets assigned your file after it has sat on the corner of someone else's desk for months will try to close the case quickly and finish his or her own cases. You are more likely to get a favorable decision when a new agent takes this attitude.

If you want a resolution quickly and the current employee has been given a reasonable amount of time (which should be several months and varies with the complexity of the problem), it is time to contact the problem resolution office. Your local PRO should be listed in the telephone directory. The IRS says that the backlog in PROs is now quite substantial. You will get better results if you write a letter to the PRO that clearly states your problem and gives your name and taxpayer ID number. The IRS says that you now should wait 45 days for a response. If you haven't heard anything, you can call the PRO and ask who has been assigned your letter and what the status is. When discussing your case be cooperative instead of demanding. Offer to do anything necessary to get the matter resolved.

If the PRO takes too long or you don't want to bother with it, simply tell the agent handling your file to issue a decision. Tell him or her that you prefer a negative decision to continued negotiation and discussion. Once a decision has been rendered, you can take it to the appeals level. Turnover is lower at appeals and employees are better informed about the tax law. In addition, appeals officers have strict quotas and time limits on handling cases. They have to close cases quickly and keep them out of court. When your position is truly reasonable and the audit agent just won't accept it, you are better off taking the case to appeals. If your problem is with the collection division instead of an auditor, you should stick with the PRO.

88) Never give originals of any documents to the IRS. Auditors frequently will resolve an issue in your favor when they see documentary evidence that supports your writeoffs. But always send photocopies to the IRS, not originals. It is not unusual for documents to be lost in the post office or the IRS mail room. When an agent claims not to have received documents or to have lost them, there's nothing you can do about it. There are numerous court cases holding that you cannot sue the IRS for damages, and the burden of proving the writeoffs remains with you. Always send copies of documents.

89) The word to taxpayers who've been audited is to appeal all negligence penalties. IRS auditors are routinely imposing negligence penalties any time they find a deficiency in someone's taxes. But that's wrong, because the penalties are to be imposed only when the deduction was clearly inappropriate and the taxpayer should have known that. Because auditors are misconstruing the law, the Appeals Office is just as routinely reversing the negligence penalties. Filing an appeal is an easy way to save money.

90) You lost your right to use the Tax Court if you don't tell the IRS you moved. You have only 90 days after the IRS issues you a notice of deficiency to file a petition in the Tax Court. If you miss the deadline, you can't use the Tax Court. But the 90 days starts running when the IRS mails a notice to your last known address. It doesn't matter if you no longer live at that address and do not receive the notice if that address is your last known address. The IRS generally is justified in mailing the notice to the address on the tax return in question. It usually doesn't matter that you've moved and filed subsequent tax returns with the new address. If you gave a full power of attorney to a tax advisor, the IRS can send the notice to that person unless you have informed the IRS that the power is revoked. The only official way to notify the IRS of a change of address is to report the change of address to the IRS on their official change of address form, Form 8810, which you mail to the service center where you have been filing the returns. Keep a copy for your files.

91) Don't let the IRS bluff you into losing legitimate deductions. Auditors are trained to say that if you don't have exact records, you can't take the deductions. But this isn't always true. It is true where travel and entertainment expenses are concerned. But in other cases, the Cohan rule applies. This rule allows you to estimate the amount of your expenses when the records are incomplete. All you have to do is give reasons why the estimates are reasonable. The Cohan rule even applies to auto expenses under the law passed by Congress in 1986.

92) Mailing your tax return late is not always going to get you into trouble. First, if you realize before April 15 that the return is going to be late, you can file Form 4868. This gives you an automatic four month extension, and your return is not due until August 15. You still have to pay the tax by April 15, but there is no penalty when the final return is filed late. There are other reasons the IRS will accept as reasonable excuses for filing late. If you mailed the return on time but didn't put sufficient postage on it, the IRS will let you go. But save the original envelope as evidence. Other valid excuses are a death or serious illness in your family, a fire or other disaster that destroyed your records, sending your return to the wrong service center, being unavoidably absent from your home or business, asking for the proper forms from the IRS and not getting them on time, and visiting an IRS office for help but being unable to get it on time. If you qualify for one of these excuses, file a complete explanation of the reason for the delay along with your tax return. That way you should avoid any penalties for filing late.

93) Late-filing penalties are based on a percentage of the tax due. If you had net losses for the year, and filed late, there is no penalty. Your accountant may be able to clear up the backlog more efficiently and accurately if he does your return a week or two after the deadline, when he isn't overloaded with returns that must be filed on time.

94) When the IRS Special Agent comes knocking, don't let him in. A Special Agent is the IRS employee who investigates taxpayers for criminal fraud. If he is on your case, he's trying to put you in jail. You don't have to talk to him, and you don't even have to let him into your home or office. The problem is that most people think they can stop the investigation in its tracks by appearing open when the agent first shows up. Little do these people know that the agents readily acknowledge their most important evidence is often gathered in that first meeting with the taxpayer when a lawyer is not present. Taxpayers give away all kinds of damaging evidence without even realizing it. The most important question to many agents is how much money you had in the bank at the start of the year. They then add up all the money you've spent and deposited in it during the year, subtract the beginning balance, and say the remainder is your income. You have to prove that there were gifts, loan repayments and other sources of money that are not taxable. Remember that if the special agent is talking to you, he already has thoroughly examined all the paperwork the IRS has on you and probably has talked to friends, neighbors and people you do business with. Tell him that there probably isn't any problem, but you're going to play it safe and not talk to him unless your lawyer is around.

95) What can you do if your spouse gets caught red-handed by the IRSțand you signed the joint return? Since you both signed the return, each of you is potentially liable for the entire tax deficiency. The IRS generally will go after whichever spouse has more money and seems easier to collect from, even if the couple is no longer married. It is very common for one spouse to entrust the couple's financial affairs to the other and merely sign the joint return without questioning. The IRS realizes this and does provide an escape hatch for an "innocent spouse." It is very difficult to qualify as an innocent spouse because the IRS doesn't want spouses who knew what was going on to get out of their tax liabilities. When your spouse or ex-spouse failed to report a large portion of income or deducted an expense that never was incurred, you can avoid personal liability by showing that you didn't know about it, had no way of knowing about it, and that it is not fair to hold you responsible for it. It is a tough test to meet. A much better idea is to take preventive measures so that you won't fall into this situation. Be sure you are fully informed of your spouse's financial affairs. If you can't do that and think there might be a problem, you should file separate tax returns even if it means paying higher taxes.

96) Getting attorney's fees from the IRS gets easier. The 1986 and 1988 laws made changes that make it more likely the IRS will have to pay some taxpayers' attorney's fees. To win, you must establish that the IRS's position was not substantially justified. That means you usually must show that the IRS knew or should have known that it was wrong on either the facts or the law. This applies to any position the IRS takes after you receive a notice of deficiency or a notice of the decision of the IRS's office of appeals. This is an improvement over the prior law, under which the IRS could successfully argue that it could take any position it wanted prior to a court case without incurring attorney's fees. There is no ceiling on the amount of attorney's fees that may be collected. But you are limited to a maximum rate of $75 per hour unless you can show the court that a higher rate is justified under the circumstances. Usually a high rate can be justified by showing that the case was especially difficult or the attorney usually gets a much higher rate.

97) Where you file your return affects your chance of being audited. As strange as it might seem, you can reduce the chances of being audited by moving. IRS statistics show that taxpayers in the national's central region (Ohio, West Virginia, Michigan, Indiana, and Kentucky) had the lowest percentage of audited returnsț0.93%. Taxpayers in the western region (composed of 17 western states) had the greatest percentage of audited returnsț1.73%. Among individual cities, taxpayers in Manhattan had by far the greatest likelihood of being audited. Of all Manhattan taxpayers, 1.98% were audited. The odds climb dramatically for business taxpayers. The IRS says 2.83% of corporations and 3.42% of partnerships in Manhattan were audited. You're least likely to be audited if you live in Boston, where only 0.69% of returns were audited. The IRS offers no explanation for the difference in audit rates. Wondering if the IRS will pick you to audit? UMI Books On Demand has just arranged to reprint a report which has been unavailable for many years. How The Internal Revenue Service Selects Individual Income Tax Returns For Audit shows the basis for IRS audit selection using excerpts from the U.S. General Accounting Office study. To order, send $25 to University Microfilms International, 300 North Zeeb Rd., Ann Arbor MI 48106. Be sure to specify catalog number AU00381 as they have over 135,000 titles in their catalog.

98) Be sure you avoid the IRS's "badges of fraud." These are acts that the IRS uses to identify tax returns that could yield significant back taxes after a detailed audit. The IRS will give a return an initial review. Usually if one of these badges is not found, the auditor will conclude that time is better spent on other returns. The first thing the IRS looks for is understatement of income. If you fail to report a substantial amount of income or an entire category of income (such as tips), the IRS will look further into your return. Fictitious or improper deductions also are a sign the IRS is alert for. If you claim a nonexistent dependent or inflate a category of deductions, you can expect a long and detailed audit. The same holds true if you engage in accounting irregularities such as keeping two sets of books, having inadequate records, or routinely postdating documents. The IRS is particularly interested in taxpayers who have no books or records. Allocating income to related taxpayers is another act the IRS looks for. Often these allocations are made to fictitious taxpayers, or the device used to allocate the income to someone else is a sham. The IRS will closely examine such transactions. A taxpayer's conduct when meeting with an auditor is another sign the IRS considers. If you evade questions, refuse to provide documents, claim that records were lost or destroyed, or appear hostile to the agent, it will be taken as a sign that you have something to hide. You can avoid attracting the IRS's attention by keeping accurate records, correctly stating deductions, and complying with an auditor's requests for documentation.

99) Taxpayers in some occupations are more likely to be audited than others. The IRS recently announced a campaign to examine more returns of self-employed individuals. These are returns that include Schedule Cs listing different business expenses. The IRS says these individuals are in the best position to underreport income and overstate deductions and will get closer scrutiny in the next few years. Airline pilots are frequent audit targets because they have high incomes (at least until recently), tend to invest in tax shelters, and often claim questionable travel expenses. Professionals, artists, entertainers, real estate agents and independent contractors are big audit targets for similar reasons. Flight attendants, curiously, have a high audit risk because travel expenses tend to be an unusually high proportion of their income and many attendants try to deduct clearly personal expenses such as hairstyling, pantyhose, and cosmetics. It is believed that executives have the lowest audit risk because they are salaried employees and this limits their tax avoidance possibilities. Consultants have a high audit risk because they can easily underreport income and overstate deductions. But if you write "executive" as your occupation and an auditor discovers you are a consultant with your own corporation, this will be considered an act of deception and the auditor will take a close look at your return.

100) If you've found a loophole here that you forgot to take in the past, you can file an amended return. Form 1040X can be filed anytime within three years after the original return is filed. You file an amended return to change how you reported an item in the past or to add items that were forgotten. The problem, however, is that the IRS will not only scrutinize the change you are making but often will decide to look over the entire return. Most tax advisors agree that filing an amended return substantially increases your chances of hearing from an audit agent. The solution could be to hold the amended return until about a week before the filing deadline. The IRS has only three years from the date a return was filed to make any changes in it. So if you file the amended return at the last minute the IRS doesn't have much time to examine the original return. The only objections it can make are to your changes.

One of the best ways to protect yourself against such a calamity is to have professionals prepare an asset protection plan in advance of any problems.

Doing so is not expensive, and provides a great deal of assurance that you and your family will have the benefit of the money you have built up through years of work. Asset protection plans are a relatively new area of law, prepared by lawyers who specialize in protecting what you own instead of litigation.

Asset protection is different from traditional retirement or estate planning. It is the systematic and integrated protection of your family and business from risk.

Most financial planning is intended to help you establish wealth so you can retire, and pass on as much of that wealth as possible to your family after death.

Asset protection plans include estate plans but are intended to also help you keep your wealth while you are living. They often involve legal structures such as family limited partnerships, children's trusts, exempt assets, offshore trust arrangements and living trusts.

Asset protection offers you an advantage over other approaches to financial planning.

For example, more lawsuits are being filed today than at any time in history, and the top 80 percent of wage earners in the United States will be sued an average of five times during their lifetimes.

Other situations include bankruptcy filings, taxation, insurance company failures or bank financing.

Many small businesses are finding that critical financing is being pulled out from under businesses that are current in their loan payments simply because their bank has been sold or merged and no longer wants that type of loan.

If someone slips and falls in a business, or if a car taps their car's rear end, they react like they just won the lottery. If an armed thug breaks into a home in the dead of night, slips on a child's marbles, and breaks a leg, he can sue and likely win.

A small construction firm is having its monthly partners meeting. They send out for pizza. Their secretary decides to go pick it up. Unknown to the partners this person has a horrible driving record. On the way back the secretary runs into a group of pedestrians. The police arrive. The secretary eats the pizza and the partners are sued. A judge decides that they are liable as the secretary was performing an act for the partners in her ordinary course of employment. The jury, sympathetic to the victims and enraged by the driving record, awards several million in damages. As partners, all of the owners are jointly liable for payment. In effect, the jury has awarded the plaintiffs three condos, two sail boats, three houses, nine cars, and twelve installment notes to pay the balance over a lifetime.

A land speculator bought a parcel for subdivision, held it for one week and sold it to a developer. Later, after houses were built, a homeowner who was an environmental engineer noticed an old buried drum. It contained a deadly toxin. The Environmental Protection Agency held the site to be a "superfund" site. The largest law firm in the world, Uncle Sam, began an action against the landowners. The suit brought in the land speculator. Although the total invested was only $100,000, the liability exceeded $30,000,000. Under the law this can never be discharged in bankruptcy. The builder and the developer collapsed, leaving the individual land speculator with an overwhelming judgment.

Asset protection plans are not only for the wealthy. An asset protection plan can be relevant if you drive a car, have children, own a business or simply want to pay less taxes.

It can come into action in the event of an auto accident, if someone injures himself at your business, or possibly in the case of a divorce.

A restaurant owner could easily be at risk, if, even despite his or her best efforts, a patron drinks too much and is involved in a drunken driving accident. An asset protection plan could protect the owner's personal wealth from a lawsuit even if insurance did not.

Similarly, a doctor is at risk of malpractice, regardless of the level of the care provided. Awards in those cases routinely exceed the amount of insurance coverage. An asset protection plan could keep the difference from coming out of the doctor's personal assets.

Asset protection plans are fully legal. It is not something for people who might want to avoid the law or their responsibilities. The law is clear as to what is permissible and what is not. Asset protection simply gives protection against unfair lawsuits and gives a level playing field to operate from.

The goal is to structure the plan so you never have to misrepresent yourself or worry about the legality of the plan. A proper asset protection plan will also reduce taxes and protect assets from IRS seizure.

The best way to do this is to seek the assistance of professionals.