If asked to describe our federal tax system, one word you probably wouldn't use is "simple"  With so many rules and exceptions to the rules, even a seemingly simple tax situation is often more complicated than meets the eye. But don't let complexity deter you from one very simple goal: keeping your income taxes as low as possible. The following are a few strategies we hope you'll find useful in your planning. FILING STATUS - Not Always Obvious Your filing status determines which of the four tax rate schedules you must use to compute your tax liability for the year (see attached table) and your tax bracket.  Many other tax provisions also depend on filing status.  For most taxpayers, determining filing status is relatively straightforward.  In some situations, though, what appears to be the obvious choice may be the wrong one for you and may cost you unnecessary additional tax dollars. For example, you can file as head of household if you are single and provide a home for more than  half the year for your unmarried child, grandchild, or another person who is your dependent.  The tax rate schedule for a head of household is more favorable than the schedule for a single filer. R Do you contribute to the upkeep of a parent's household?  If you aren't married, you may qualify for head of household status.  Your parent doesn't necessarily have to live with you - supporting a dependent parent in his or her own home or in a nursing home can qualify. R Usually, a married couple will come out ahead by filing a joint return.  While it is possible for each spouse to file a separate return, this typically results in a higher combined tax liability than filing jointly. R A married person may be entitled to file a joint return for two years after the year of death of a spouse.  This may result in a lower tax than using the single or head of household schedule.  To qualify, the surviving spouse must maintain a household for a dependent child and remain unmarried.       Individual Tax Rate Schedules     Taxable Income ($)     Estimated 2004   Rate (%) Brackets* Single 10 0 - 7,150   15 7,151 - 29,050   25 29,051 - 70,350   28 70,351 - 146,750   33 146,751 - 319,100   35 Over 319,100       Head of Household 10 0 - 10,200   15 10,201 - 38,900   25 38,901 - 100,500   28 100,501 - 162,700   33 162,701 - 319,100   35 Over 319,100       Married Filing Jointly 10 0 - 14,300 (and Surviving Spouses) 15 14,301 - 58,100   25 58,101 - 117,250   28 117,251 - 178,650   33 178,651 - 319,100   35 Over 319,100       Married Filing Separately 10 0 - 7,150   15 7,151 - 29,050   25 29,051 - 58,625   28 58,626 - 89,325   33 89,326 - 159,550   35 Over 159,550       * These bracket amounts are adjusted annually for inflation. Hiring Your Child - If you own a business, giving your child a job may save your family taxes.  Business may deduct reasonable pay as a business expense.  Because the child earns the income, it is subject to the kiddie tax.  And earnings up to $4,850 won't be taxed because of the standard deduction (estimated 2004 inflation-adjusted amount).  If your child is under 18 years old, you will not have to pay Social Security taxes on his or her wages if your business is not a corporation.  Similarly, as a self-employed individual, the deduction for your child's salary would lower your self-employment income - as well as the taxes on that income. YOUR HOME as a Tax Shelter From a tax standpoint, your home may be one of the best shelters available.  While you own the home, you'll be able to deduct qualifying interest you pay on a mortgage and/or a home equity loan or line of credit.  And, when it comes time to sell, you may be able to exclude from your income all or part of any profit you make. Home Mortgage Interest.  Interest on up to $1 million ($500,000 if married filing separately) borrowed to buy or build your principal and/or second residence (called "acquisition indebtedness") is fully tax deductible.  The debt must be secured by the home. Refinanced debt is included in this category to the extent of the balance outstanding when the loan is refinanced. Points.  In most cases, you may deduct any points (prepaid interest) you pay to obtain a mortgage in the year paid.  However, if you refinance an existing mortgage, you'll generally have to deduct any points you pay ratably over the term of the loan.  Spreading out the deduction is also an option for points paid on your original mortgage.  Electing this tax treatment may be beneficial if you don't have enough deductions to itemize in the year you take the mortgage but expect to itemize in subsequent years. Home Equity Interest.  You also may deduct interest on up to $100,000 ($50,000 if you are married filing separately) of home equity debt secured by your principal or second residence, regardless of how you use the loan proceeds. R Boats and recreational vehicles can be second residences qualifying for the interest deduction.  Several requirements apply, however. R Consider taking a home equity loan for large purchases, such as an automobile or furniture, that you would otherwise finance with debt that would produce nondeductible interest.  You also may want to use a home equity loan to pay off credit card balances or other installment debt.  But be cautious.  Remember that a home equity loan puts your house at risk if you fail to repay the loan. Selling Your Principal Residence.  If you meet certain requirements, you can earn a profit of up to $250,000 ($500,000 if married filing jointly) on the sale of your principal residence without having to pay tax on any of the gain.  The full tax break is available only once every two years, and you must have owned the home and used it as your principal residence for a total of at least two years out of the five years prior to sale. If you must sell your residence before you've met these requirements for health reasons or because of a change in place of employment or certain IRS-approved unforeseen circumstances, you still can qualify for a reduced gain exclusion.  However, the maximum excludable amount would be a percentage of $250,000 ($500,000 if married filing jointly). Example.  After just one year on the job, Gabriel's employer is transferring him to another state.  As a result, Gabriel must sell the house he recently bought and move.  If Gabriel sells the house after owning and occupying it for one year, he'll be entitled to exclude any profit he makes on the sale up to a maximum of $125,000.  This represents half of the $250,000 maximum exclusion available to a single taxpayer who meets the two-year holding period requirement. The IRS is taking a broad view of what constitutes an unforeseen circumstance.  Divorce, a job loss resulting in eligibility for unemployment compensation, or the death of your spouse are among the acceptable reasons that might qualify you for a tax break if you have to sell your home before meeting the requirements for the full $250,000/$500,000 exclusion. Because your financial situation is unique, be sure to obtain professional advice before acting on any of the above general suggestions. Please call us if you have any tax planning questions.