You can start by setting up a filing system for taxes that works for you. It can be as simple as a series of envelopes or folders to hold tax information. Or, if you prefer, a computerized program can easily keep track of expenses.

What to keep track of varies from person to person, so a look at your last tax return will help you identify the tax matters that pertain to you. Make a folder or set up a computerized account for tax deductions using the tax return as a guide. You ll be amazed at how easy tax preparation will be next year with your own personalized recordkeeping system.

What s your tax bracket?

Your tax bracket is the percentage of tax that you pay on your last dollar of income. Once you know this percentage, you can better determine the after-tax cost of de- ductible items. You can find your tax bracket by finding the taxable income on your Form 1040 and looking up the rate at irs.gov ( federal tax rate schedules ).

Refund or tax due?

If you received a large refund, you might consider reducing your withholding at work to free up more take home pay now.

If you owed tax, you might consider prepaying a little more or increasing your withholding at work so an underpayment penalty might be avoided. Or, become income and deduction savvy by reading on.
The basic strategy for tax planning can be summed up in the following two statements.

Find ways to reduce the impact of your income. Maximize your deductions and credits.

WAYS TO REDUCE THE IMPACT OF YOUR INCOME

Defer more income into retirement.

Contributing to a 401(k) and/or traditional IRA is a great way to lower your taxable income. Con- tributions are deducted from your income before taxes. For 2008, you can put up to $15,500 into your 401(k), $5,000 into your IRA (subject to income limitations), and more if you are over 50. You save on taxes now, shelter the money from tax as it grows, and contribute to your retirement wealth.

Start a Roth IRA.

Your present income tax will not be reduced by a Roth contribution, but if you follow the rules, your Roth contribution of up to $5,000 ($6,000 if over 50) and its earnings will be removed from taxation forever.

Use your flexible spending account.

A medical reimbursement account is funded with pre-tax dollars, so you reduce the impact of your income. You save income tax and Social Security/Medicare dollars with each contribution. If you haven t signed up for this awesome tax saving tool, you should consider doing so. A review of last year s medical expenditures can help you determine the amount to set aside.

If you have children in child care, you can set aside up to $5,000 in a pretax child care ac- count. This money also escapes both income and Social Security/Medicare taxes, and in most cases, provides better tax savings than the Child Care Credit.

Start a college plan.

You have two options:
529 plans are college saving programs set up by states. They will not save current tax dollars, but the money contributed saves future dollars because they grow tax-free and can be cashed in with no tax liability when used for qualifying post secondary school expenses. In 2006 these plans were made permanent by Congress, so their future tax-free status is assured.

Coverdell IRAs are self-directed education accounts. Contributions to these are more limited, but they also grow tax-free and proceeds can be used for education at any level from kindergarten to college.

Rebalance your portfolio.

Do you have any losers? You can sell stocks at a loss and offset all of your present gains plus $3,000 of other income, such as salary. Hopefully, this is not your case.

If you have stock gains instead of losses, take advantage of the lower taxes on long term capital gains by keeping your stocks longer than a year. If you are in the 15% tax bracket or lower, 2008 is a good year to sell assets held long term at a gain. The federal tax on long term capital gain will be 0. State taxes may apply, however. If your income including the gain is under $41,500 (single), $83,000 (married-joint), or even higher if you can itemize, you are a candidate for a free sale. A little tax planning could save you a lot of tax.

Dividends are also taxed at lower rates than interest, so consider exchanging some inter- est bearing securities for those that pay dividends.

Investing in tax efficient or index mutual funds can keep your tax bill at a minimum as long as the market performs correctly. If you desire more control over your portfolio, buy and hold individual stocks which pay low or no dividends that you expect to increase in value. No gain will be realized until you decide to sell.
Invest in municipal bonds for tax-free interest. If your tax bracket is high enough, the tax savings will outweigh the lower rate of interest you receive.

Plan for your minimum required distribution.

You must begin taking required distribu- tions from IRAs and other retirement plans by April 1 of the year after you turn 701⁄2. If you wait until that date, you will have to withdraw two years of distributions in one year. This could have tax consequences that might be more unpleasant than taking a distribution this year and one next year. It s wise to think ahead.

If your income is variable, consider a conversion of money from a traditional IRA to a Roth IRA in a year when your income is low. By doing this, you are creating taxable income, but you reduce the amount that must be distributed from the traditional IRA when you turn 70 1/2.

Use your home as a tax shelter.

Under the principal residence gain exclusion rule, you can reap tax-free profits of up to $500,000 ($250,000 if single) upon the sale of your home if you have lived in it for at least two years. There is no limit to the number of times you can do this. This means that you can repeatedly buy fixer-uppers, rehab them, and sell them after two years occupancy.

Did you know that you can rent out your home for up to 14 days each year without having to declare the income?

MAXIMIZE YOUR DEDUCTIONS AND CREDITS

Is itemizing worth it?
Did you itemize your deductions last year? Check out Schedule A. For 2008, the stan- dard deduction tops the charts at the follow- ing levels: married filing joint get $10,900, head of household gets $8,000, and single taxpayers get $5,450. Many more taxpayers are finding it difficult to itemize. If you fall into this situation, you may benefit by bunching. The bunching technique involves itemizing every other year by doubling up on itemized deductions and using the standard deduction in the next year.

Do you always lose out on medical and mis- cellaneous deductions because of the in- come limits? You can try bunching in this situation too.

Get the most out of non-cash contributions. Give your old clothing and household items to charity and get a deduction for the fair market value. To maximize your deduction, make a list, take photos, and make sure you get a receipt. The IRS has ruled that items must be at least in good condition. Items of small value such as socks and underwear will not be counted.

Contribute appreciated stocks to charity. If you give stock (held long term) that has appreciated in value to a charity, you can deduct its fair market value without having to pay tax on the gain.

Conversely, if you wish to donate stock that has decreased in value, sell it, take the loss, and give the charity money.

Document your volunteer activities.
If you volunteer at church, school, or other non-profit organizations, keep track of your out of pocket expenses and log your miles driven. The tax savings can be substantial. Save a receipt or cancelled check for each purchase.
Plan your vehicle donation.

You may be a loser if you pick the wrong charity. If the charity sells your vehicle, your deduction is limited to the amount the charity actually receives from the buyer. You will be issued a Form 1098-C by the charity ac- knowledging the donation. If the charity uses it, donates it to the poor, or improves it, you may still deduct the fair market value. So, select a charity that will either use or improve
the vehicle to maximize your deduction.

Document your cash donations. A receipt from the organization, a cancelled check, or a bank record is required to substantiate a cash donation of any amount. A log is no longer sufficient evidence, so save receipts.

Cash in on your kids.
Your kids are worth a bundle at tax time.
The exemption for claiming a child for 2008 is $3,500. This means that the fed- eral tax savings for each of your qualifying children is $875 if you are in the 25% bracket.

If your 2008 income is under the phase- out range, you will get an extra $1,000 credit for each child under age 17. If you make too much to qualify, try using one of the income-reducing techniques dis- cussed earlier to take advantage of this tax break.

Your children in college might qualify you for either the Hope Credit or the Life- time Learning Credit. Be aware of the fact that these credits begin to phase out at income of $48,000 for a single taxpayer ($96,000 joint). You may want to take steps to reduce your income if you re short of qualifying (See above strategies for reducing income.).
Try some income shifting. Put some income-bearing securities in your kid s name and let them pay the tax. The first $900 of income is not taxed, and the next $900 is taxed at only 10% for 2008. Ev- erything over $1,800 will be taxed at your rate if your child is under 24 and a full time student.

Missing out on all of these tax savings due to lack of kids? Adopt one. You could get a tax credit of up to $11,650 if you qualify.

If you need medical insurance, start a HSA. You must be under 65, covered by a high deductible health plan, and have no other insurance to set up a HSA. If this is you, you can put up to your deductible into the HSA account and deduct the payment. This gets you a medical deduction without having to itemize. Withdrawals from the HSA are not taxed if used for medical expenses.

Remember to properly document your charitable donations. A receipt from the charity is required for donations of over $250 and a receipt, cancelled check or other evidence is re- quired for all donations of any amount.

MAXIMIZE YOUR BUSINESS DEDUCTIONS

If you own a business, being organized is very important. Channel your income and deductions into a single bank account, monitor it on a regular basis, and use a computer program or filing system to sort deductions into categories.

Plan your vehicle deduction.
If you own a large vehicle, you will most likely want to save all of your receipts for expenses to deduct actual costs. If your vehicle is smaller and more economical to run, you will want to use the standard mileage rate. In any event, log your business miles on a daily basis. The deduction for the business use of a vehicle can be substantial, and the proof is in the documentation.

Hire your kids.
For 2008 your child can earn up to $5,450 working in your business before any income tax needs to be paid on the earned income. This can be increased to $10,450 if a $5,000 traditional IRA is purchased. While your child earns tax-free income, you save tax dollars by deducting the wages paid. In the 25% tax bracket, for example, you save $2,612.50 in Federal tax plus $1,476.53 in self-employment tax by paying a wage of $10,450 to your minor child. Be aware that the work the child does must be appropriate for the child s age and must actually be performed to make this a legitimate expense. For example, you could use the technology skills of your computer- savvy children to help in your business.

Keep good records, have a signed employ- ment agreement outlining the work to be per- formed, and track the payments of wage into your child s bank account.

Hire your spouse.
You can set up a medical reimbursement plan under Code Section 105. Your spouse will get employer-paid insurance and medical ex- penses paid.

Employing your spouse will also enable you to deduct his or her travel expenses if you travel together for business.
The law enables you to reimburse up to $220 of parking at or near work or up to $115 in mass transit expenses per month for your employees on a pre-tax basis.

Need new equipment?
You can elect to expense up to $128,000 in new equipment in 2008. This will give you a more immediate tax savings than deprecia- tion.

Use a home office.
If your home is the only location your business is conducted, set up an area that is exclusively used for business. You ll be able to deduct a percentage of your household expenses.

Set up a self-employed retire- ment plan. Save money on your taxes and provide for your retirement at the same time by contributing to a pension plan. You can put up to 25% of your net income from self-employment each year in a SEP. The decision to contribute can be made as late as the due date of your tax re- turn for the year. If you are a one per- son business, or are employing only your spouse, the SEP is great. If you have other employees, you will have to cover them at the same percentage as yourself.

You should consider the Simple IRA if you have employees. This plan needs to be set up by October to start it for any year. Employees can elect to put up to $10,500 ($13,000 if age 50 or over) each into the plan on a pre-tax basis. You must contribute 2% of all employees wages or 3% of contributing employees wages. It s a simple, easy way for a small employer to provide retirement.

Make yourself aware of the manufacturers deduction. Your business qualifies for the manu- facturers deduction if you produce a qualified tangible product or are in- volved with domestic construction. The deduction is 6% of qualified domestic production for 2008, and might produce substantial tax savings. If your busi- ness does not have wages paid, con- sider hiring employees or incorporating and hiring yourself.

A word to the wise:
The ideas outlined in this letter have been presented in general terms. Limitations and phase-outs may ap- ply. To receive full benefit from these suggestions, and to remain in compliance with federal and state regulations, it might be a good idea to make a tax planning appointment.