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Want to reduce your taxable income?
Find all the deductions available to you

Deductions are key to reducing your taxable income. Fortunately, though Congress has done a lot of tinkering with the tax code in recent years, they've been careful not to take away taxpayers' ability to deduct certain items (or exclude other items from income). So, if you're seeking ways to reduce your taxable income, you'll find them. You just need to know where to look. Here are some important deduction and other income-reduction opportunities to keep in mind.

Consider a Health Savings Account (HSA).
An HSA (which can be employer-sponsored or set up by an individual) allows contributions of pretax income to an interest-bearing account or an account invested in certificates of deposit, annuities, stocks, bonds or mutual funds. (The 2007 limit is $5,650 for a family plan or $2,850 for individual coverage. Account holders age 55 and older may contribute an additional $800.) You can have more than one HSA as long as total HSA contributions don’t exceed the applicable limit. HSAs require that you be covered by qualified high-deductible health insurance. Withdrawals for medical expenses are tax free, and you can carry over a balance from year to year. Plus, under the Tax Relief and Health Care Act of 2006, you may now be eligible to roll over amounts from your FSA (see below) or IRA (see page 13) into your HSA.

Look into a Flexible Spending Account (FSA).
You can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit. The plan then pays or reimburses you for medical expenses incurred that weren't covered by insurance. What you don't use by the end of the plan year, you lose — though, if your plan allows, you can be reimbursed for expenses incurred up to 21/2 months after the plan's year end.

Make the most of home-related tax breaks.
You can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. If you have more than two homes, you can choose the home to treat as your second residence. Deduct related points in addition to interest if the loan is for purchasing or improving your principal residence. Refinancing points must be amortized over the loan's term. When you sell your principal residence, you can exclude up to $250,000 ($500,000 if you're married filing a joint return) of the gain you realize, as long as you meet certain tests.

Replace nondeductible interest with home equity loan interest.
You may be able to maximize your interest deduction by paying off credit cards or auto loans — whose interest isn't deductible — with money from a home equity loan. Interest generally is deductible on home equity loan balances up to $100,000. If you're paying off credit cards, you likely also will benefit by paying interest at a much lower rate.

Maximize charitable giving.
Donations are generally fully deductible, as long as you itemize deductions and don't surpass statutory limits — 50%, 30% or 20% of your adjusted gross income (AGI). The applicable limit depends on what you donate and whether the recipient is a public charity or an operating or nonoperating foundation. Contributions in excess of the limits may be carried forward — for future use — for up to five years. For larger donations, consider more sophisticated charitable vehicles such as private foundations or donor-advised funds.

Be aware that, under the Pension Protection Act of 2006 (PPA), every cash donation must be supported by a canceled check, credit card receipt or written communication from the charity. Moreover, clothing and household good donations must be in at least "good used condition" to be deductible.

Give directly from your IRA.
If you're 701/2 or older, PPA allows you to give up to $100,000 in 2007 to charity directly from an IRA. Although you won't get a charitable contribution deduction, the IRA distribution won't be taxable. Plus, you avoid charitable contribution deduction limits, such as the AGI limits.

Donate appreciated assets.
If you donate property you've held more than one year, you may be able to take a charitable deduction equal to its current fair market value. Plus you'll avoid paying tax on the long-term capital gain you'd incur if you sold the property. For instance, instead of giving cash, donate appreciated publicly traded securities. Beware: The deductible amount is subject to tighter limits (30% or 20% of AGI) than cash contributions.

Create a charitable remainder trust (CRT).
A great way to benefit a charity while helping ensure your own financial future is to fund this trust, which, for a given term, will pay income to you. At the end of the term, the trust's remaining assets pass to one or more charitable organizations. You receive an income tax deduction for the present value of the amount that will go to charity. And you can contribute appreciated assets and avoid paying capital gains tax while possibly increasing your annual cash flow.

Watch out for the alternative minimum tax (AMT).
AMT rates are 26% and 28%, but many deductions allowed in calculating regular tax liability aren't allowed for the AMT, such as state and local income taxes, property taxes, and some miscellaneous itemized deductions. If your AMT liability exceeds your regular tax liability, you must pay the AMT. Unless Congress acts, the AMT exemption amounts for 2007 will fall to $45,000 for joint filers and surviving spouses, $33,750 for single filers and those filing as heads of households, and $22,500 for married persons filing separately, likely making more taxpayers subject to the AMT. Project whether you may be one of them this year or next; you may be able to time income and deductions to either avoid or reduce the impact of the AMT.

CHART 1: 2007 INDIVIDUAL TAX RATE SCHEDULE

Taxable income	Base tax	Marginal tax rate (tax on next dollar)	Taxable income	Base tax	Marginal tax rate (tax on next dollar)

Married filing jointly or surviving spouse			Single

$ 0	$ 0	10%	$ 0	$ 0	10%
$ 15,650	$ 1,565	15%	$ 7,825	$ 783	15%
$ 63,700	$ 8,773	25%	$ 31,850	$ 4,386	25%
$ 128,500	$ 24,973	28%	$ 77,100	$ 15,699	28%
$ 195,850	$ 43,831	33%	$ 160,850	$ 39,149	33%
$ 349,700 and above	$ 94,601	35%	$ 349,700 and above	$ 101,469	35%

Married filing separately			Head of household

$ 0	$ 0	10%	$ 0	$ 0	10%
$ 7,825	$ 783	15%	$ 11,200	$ 1,120	15%
$ 31,850	$ 4,386	25%	$ 42,650	$ 5,838	25%
$ 64,250	$ 12,486	28%	$ 110,100	$ 22,700	28%
$ 97,925	$ 21,915	33%	$ 178,350	$ 41,810	33%
$ 174,850 and above	$ 47,301	35%	$ 349,700 and above	$ 98,356	35%

Data source: U.S. Internal Revenue Code

Tax Action Strategy:
TAKE ADVANTAGE OF RENTAL RULES

If you rent all or a portion of your primary residence or vacation home for less than 15 days, you need not report the income. If you convert your residence from personal to rental use, you may reap other benefits. For example, you may be able to do a like-kind exchange after the conversion. (See page 8.) Or, if you sell the property at a loss, you may be able to However, you can’t deduct any decline in value that occurred before the home was converted to rental use.

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