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-- Posted: May 24, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

How can I reduce my adjusted gross income?

Dear Dollar Diva,
What are some prudent, relatively low-risk ways for a taxpayer to reduce Adjusted Gross Income and thereby allow a greater percentage of his itemized deductions to be recognized? Also, how can I find an Adviser to help with this kind of question? Do I need a separate financial planner, tax accountant/lawyer and estate planner?

-- Bob

Reducing Adjusted Gross Income should be the goal of every taxpayer. AGI has an impact on the following itemized deductions:

  • Medical and dental

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  • Casualty and theft losses

  • Job related expenses such as tools, travel, job education, union dues, uniforms

  • Other miscellaneous deductions such as tax preparation fees and investment expenses

To reduce AGI, look at the first page of your Form 1040. Examine each line of income and adjustments, and figure out what you can do to make the bottom line smaller. Here are some suggestions:

Income and Adjustments Suggestions from the Diva
Wages, salaries Make maximum contributions to 401(k) and other employer-sponsored, tax-deferred plans.
Taxable interest and dividends Put your savings in tax-exempt money market funds; for medium- to long-term investments that are not tax deferred, invest in Treasury I-Bonds, tax efficient mutual funds and tax-exempt municipal bonds.
Business income -- Schedule C The IRS allows you to deduct all "ordinary and necessary" business expenses -- make sure you do. Publication 334, Tax Guide for Small Business is a good resource for the Schedule C filer.
Capital gains Adopt a buy-and-hold investment strategy; invest in tax efficient mutual funds.
IRA distributions Don't touch your IRA until you retire.
Social Security benefits If you're retired and collecting social security, don't roll your IRA into a Roth if it's going to increase the amount of Social Security that will be taxed.
IRA deduction Make maximum contribution allowed.
Student loan interest; moving expenses Don't forget to take these deductions.

How do I find an Adviser?

If all you need is help with your income tax, an enrolled agent can be a less expensive alternative to a CPA. If your financial situation is complex and you need help with tax, financial planning and estate issues, I suggest you find a good certified public accountant. You may not need a separate financial planner, tax accountant/lawyer and estate planner, but if you do, a good CPA will refer you to an office where you can find the help you need.

The best way to find a CPA or an enrolled agent is to ask for referrals from your friends, relatives, neighbors, acquaintances, co-workers and anyone else with financial needs similar to your own.

When you find one or two who will not charge you for an introductory meeting, set up appointments with them. For tax professionals, the best time to do this is between April 15 and Nov. 15.

Licensed professionals must have their licenses displayed. They will usually have their credentials framed and accessible. If they don't, I'd wonder why.

At each visit, ask for the cost. There's no hurry; you've lived without a financial professional this long, you can live without one until you find one you like and trust. It is best to start slowly; let him give you a quote to do your tax return, and if it sounds fair, let him do it. If you're happy with the job, the relationship will build from there. If you're not, resume your search.

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