VISTA, Calif. -- Soon, it will be time to gather up all 2005 earnings
statements in order to file taxes. An astute taxpayer will also gather up
all eligible receipts to minimize taxes.

While tax evasion is illegal, tax avoidance is perfectly legal. In fact,
most political campaigns are based on promises of tax cuts and other tax
relief. It's up to the taxpayer to find and apply them.

With notable exception of treaty income, all tribal members' salaries are
subject to federal taxation. Underpayment is subject to a 40 percent
penalty plus interest. Enforcement is tight. Bank accounts can be levied if
taxpayers don't pay up.

Taxes are "bracketed" into income ranges. As taxable income goes up, the
proportion of taxes also goes up. According to the 2005 Internal Revenue
Service tax table, a single taxpayer has to pay 10 cents on the dollar on
the first $7,300. This is called the 10 percent tax bracket. However, if
the same taxpayer has between $71,950 and $150,150 of taxable income, taxes
will be 28 cents for each dollar. This is the 28 percent tax bracket.

There are three categories of potential tax savings: tax-deductible
savings, tax deductions and tax-advantaged investments. (Note that there
are more options for people who work, own a business or invest.)

This article will focus on the most commonly available forms of
tax-deductible saving. Money put into this type of savings isn't subject to
taxes. Interest and profit earned from the account is tax-deferred until
the money is taken out. Usually, money can be taken out without penalty at
age 59- or to cover eligible medical expense, disability needs, hardship,
first-time home purchases, college expenses, etc.

The power of tax leverage can be tremendous. Assume that an investor is in
the 25 percent tax bracket and puts $250 at the end of each month into a
tax-deferred account starting on Aug. 31, 1976. If the investment tracked
the Standard and Poor's 500 stock market index, the investor would have had
$875,576 by Nov. 30, 2005. It is all due to the increase in the market
value of the portfolio of stocks.

However, if the investor had invested the money in a non-tax deferred
account, the balance would only have been $656,683.

Note that the S&P 500 is an unmanaged index of widely held common stocks
that reinvests all distributions. It is not possible to invest directly in
an index. Mutual and exchange-traded funds are created to track its

While tax savings may seem to benefit the rich, the IRS provides a credit
of up to $1,000 (up to $2,000 if filing jointly) to low-income workers.
This is a dollar-for-dollar offset of actual taxes to be paid.

The Retirement Savings Contributions Credit applies to individuals with
incomes up to $25,000 ($37,500 for a head of household) and married
couples, filing jointly, with incomes up to $50,000. The taxpayer must also
be at least age 18 (born before Jan. 2, 1987), not a full-time student, and
not claimed as a dependent on another person's return.

Vehicles for tax-deductible saving include individual retirement accounts
and employer-sponsored retirement accounts such as 401(k), 403(b), 457,
Savings Incentive Match Plans for Employees of Small Employers (SIMPLE),
etc. Only working people and their spouses can contribute to retirement
accounts. However, a minor who has earned income can also participate.

Money for retirement accounts can be invested in bank savings, certificates
of deposit, stocks, bonds, mutual funds, annuities, cash value life
insurance policies, real estate, natural resources, equipment leasing
investment partnership and trusts. Exceptions are coins, art and

The IRS established different deadlines to contribute to these accounts.
For employer-sponsored retirement plans, money must be put into the plan by
Dec. 31 in order to qualify for a tax deduction.

The IRS also established different maximum contribution limits to these
accounts. Overcontributing will result in a 6 percent penalty each year the
money is left in the account and taxation of the excess amount. In general,
401(k) and 403(b) plans allow an employee to defer the tax on up to $14,000
of income. SIMPLE has a $10,000 limit.

For employees 50 years and older, the maximum is $18,000 for both 401(k)
and 403(b) plans. The maximum is $12,000 for a SIMPLE plan.

Workers whose employers do not offer a retirement plan can put money for
themselves and their spouses into IRAs. April 15 is the deadline to make a
tax-deductible contribution for 2005.

The 2005 contribution limit for IRAs is $3,500, or $4,000 for workers 50
years and older.

There are two types of IRAS: the traditional IRA, which lets the money grow
tax-free until withdrawal; and Roth IRAs, in which you pay taxes on the
money now, not when you withdraw it at retirement.

The decision between paying taxes now and deferring the tax payment depends
on current taxable income and future tax projections. For example, a tribal
member starting out in a junior position is likely to earn more in the
future. If there is no other income from tribal distributions or
investments, this tribal member's tax bracket is probably lower now.
Therefore, a Roth IRA may be appropriate.

In situations where a tribal member has substantial earnings from salary,
business income or per capita distributions, the tax bracket may be high.
Tax savings can be realized through maximum contributions to both
employer-sponsored accounts and IRAs.

Self-employed taxpayers or business owners have additional options. If they
set up a simplified employee pension plan, they can set aside as much as 25
percent, up to $42,000 maximum. If they choose to set up a defined benefit
contribution (pension) plan, the deduction can be as high as $160,000 for

A taxpayer may work at more than one job or own several businesses. A
retirement account can be set up for each entity.

People usually work at different places during their working years.
Retirement funds from former employment can be left alone or rolled over
into IRAs.

A number of states have not adopted the federal deduction rules. Only a
partial tax deduction is available to taxpayers living in the following
states: Alabama, Arizona, Arkansas, California, Georgia, Hawaii, Idaho,
Carolina, Pennsylvania, South Carolina, West Virginia and Wisconsin.

Relative to federal income tax, state income tax usually is a minor
fraction. Therefore, do not let the lack of full deductions derail anyone's
tax savings plan.

The opinions expressed are those of Cynthia Tam, CFP?. Examples cited are
for illustrations only and are not recommendations. Consult with a
financial professional before investing.