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Author: loopholes One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121565  
Subject: Re: Any advice on reducing taxable income? Date: 10/25/2008 11:03 PM
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This isn't really proactive advice, but you could look at whether it makes sense (though it rarely does) to file married filing separately rather than married filing jointly.

AMT would put a floor on extent to which this couple can lower tax bill (along with everyone else). It's hard to plan around. Wife on separate basis could come under AMT exemption phaseout, but that leaves couple combined with substantially lower total AMT shelter, and husband much more likely to pay (if he's not paying even higher regular tax). Whether this works out to more or less total tax on a combined basis, you just have to run the numbers.

Whether file joint or separate, no state income tax means Sched A sales tax deduction could be available if they itemize. You generally can deduct on Sched. A the higher of state income tax or sales tax. So OP could keep receipts to substantiate sales tax paid on everything (using debit card might be way to track). Speaking of big purchases, if they need a car, they might also consider buying a car that qualifies for an alternative fuel vehicle credit. Since they can claim a deduction for the sales tax on it, all the better. They'd need to check which brands are still eligible for the tax credit though -- there are limits so the most popular types may not qualify anymore.

The couple is entitled to other tax credits as well (child credit, child/dependent care expenses credit presumably,) that might be phased out on a combined basis but available on a separate basis (if they can be allocated to the wife, who could have a separate basis AGI that might not be above the phaseout). Many of these credits are added back for AMT, and as said before, this usually doesn't result in lower combined tax owed, but you have to do the math.

Last thought, wife's small business might be able to set up a SEP IRA plan, and it could make contributions to a SEP IRA for her and any other employees. The contributions reduce her taxable income from the business and the business may be able to deduct the contributions to some extent. This could reduce her total tax cost if the business is profitable, and/or enhance tax deferred saving opportunity. (There's also a tax credit for employer's cost of setting up a retirement plan which may apply ).
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