(MONEY Magazine) – With April 15 fast approaching, your mission (should you decide to accept it) is twofold: You want to do everything you can to slash your 1996 taxes, while putting strategies in place to cut your taxes further in 1997 and beyond. Luckily, this is Mission Possible. With the help of our 1996-97 tax package, you ought to be able to slash your overall tax bill by more than 20%, regardless of what new laws the Washington politicos impose. We begin by telling you how to shave your federal taxes by one-fifth this year and in the future through smart tax planning and by making the Internal Revenue Service work for you. The three accompanying profiles present people who've done just that. The story that follows provides tips on slashing your state tax bill even if your governor won't. Finally, as a bonus, Money turns the tables and audits the IRS; you won't like what we found.

So what kinds of tax breaks might be coming your way from D.C.? Well, don't count on a cut in your income tax rate. That notion went down the tubes with Bob Dole on Nov. 5. After sailing to re-election on a receding level of red ink, the Clinton Administration won't risk re-bloating the deficit with unpaid-for tax goodies. Our forecast for 1997: Congress and the Administration will probably cobble together a package of modest tax cuts, including a per-child tax credit of $300 to $500 for families making up to $60,000 or so; expanding the deductibility of IRAs by raising the income limits; and, perhaps most likely, a $250,000 to $500,000 capital-gains exclusion on the sale of your home plus the ability to write off any capital loss you may have when you unload your residence. Also possible: a $1,500 tuition tax credit for two years of college (one of the President's pet proposals) and estate-tax relief for family-owned businesses, a favorite of Senate Majority Leader Trent Lott (R-Miss.) and Senate Majority Whip Don Nickles (R-Okla.).

With few new tax wrinkles coming, now is an ideal time to plan ahead. Focus first on 1996. The calendar on page 65 highlights steps you can still take to pay the IRS less when you file your '96 return. In addition, below we name five ways you can work the tax system better--to the tune of more than $2,000. Then you'll find four more strategies to keep tax savings rolling in for years to come.

HOW TO SAVE ON YOUR '96 RETURN: USE THE BEST TAX SOFTWARE

To maximize your savings and minimize your headaches, your best move is to cash in on an exploding array of tax resources, available in cyberspace and over the phone. Five such tax saving moves are detailed below:

--Tap top tax software. Using tax software will let you do away with the forms hunting, countless calculations and math errors that make April so taxing on your nerves. Better yet, it allows you to experiment with different combinations of, say, auto expense claims, depreciation and retirement plan contributions to see which would save you the most. You can correct your return in seconds if you discover overlooked deductions or income just as you head for the mailbox. Using tax software could keep you from overpaying capital-gains tax when you sell mutual fund shares. It would remind you to add your reinvested dividends of, say, $2,000 to your basis--reducing your gain by that amount and saving you $560 in the 28% tax bracket.

The most popular tax programs generally cost $20 to $40, with so-called deluxe multimedia editions going for up to $50. That covers the expense of preparing federal returns only. A separate state tax package generally runs about $25. You can write off the cost of tax software as a miscellaneous itemized deduction, as long as the total plus your other miscellaneous write-offs exceed 2% of your adjusted gross income (AGI).

To help you choose the best software for your '96 return, MONEY reporter Derek Gordon reviewed the early-release editions of three of the most popular tax preparation packages: Intuit's TurboTax for Windows 3.1 or 95 and MacInTax for Macintosh ($35, $50 for the deluxe version; 800-446-8848; http://www.intuit .com); Block Financial Software's Kiplinger TaxCut ($20, $40 for deluxe; Windows 3.1 and 95 or Mac; 800-235-4060; www.conductor.com) and Parsons Technology's Personal Tax Edge ($19; DOS, Windows 3.1 and 95; 800-223-6925; www.parsonstech.com). The deluxe versions of the programs we analyzed feature short video clips of experts who talk you through vexing tax issues. (Mary Sprouse, co-writer of this article, appears on TurboTax and MacInTax.) We couldn't rate CD Title's Simply Tax ($20; Windows 3.1 and 95; 800-345-6665; www.cdtitles.com) because its 1996 edition wasn't ready at press time. But the company expects to make no major changes from last year's version, which we felt was no easier to use than your standard 1040.

Overall, our nod this year, like last, goes to TaxCut, with its helpful tax advice and bargain price. Gordon found the best new feature of all the software he reviewed to be TaxCut's "Getting to know you" pre-interview. Last year, MONEY complained that tax preparation packages were little more than electronic 1040s, asking you question after question right off those confusing forms you used your computer to avoid. This year, TaxCut changed that. Now the program asks you preliminary questions that lets it figure out exactly which tax forms to use and then asks questions tailored to your situation, making the whole process much less tedious and annoying.

Another new TaxCut feature you'll like: Block has put all 23 states that it offers--those with income taxes and the most taxpayers--onto a single $25 CD-ROM. This is especially useful for taxpayers who cross state lines to get to work and probably need to file in two states. By contrast, TurboTax charges $25 for individual-state disks. So someone living in New Jersey and working across the river in New York City, for instance, will have to shell out at least $85 for the TurboTax federal and state tax software, compared with just $45 for TaxCut. If your state is not on TaxCut's list or if you're a Mac user who doesn't live in California or New York (the only states TaxCut offers on Mac), you'll be better off with Intuit's products, since they offer software for all 45 states that have an income tax.

Both TaxCut and TurboTax have added a "refund meter" in their '96 versions. This gives you a running tally of how much you owe or are owed at every phase of the computer tax preparation process. So there won't be any surprises when you're done.

--Track down the right forms. One sure way to pay more tax than necessary is to file the wrong forms or leave out key forms. For example, take a married couple in the 28% tax bracket with $10,000 worth of deductions. If they didn't itemize deductions on the 1040 but instead filed the 1040EZ form, which doesn't let you itemize and provides only a standard deduction of $6,700, they might overpay by as much as $924.

The 1996 tax form package will be mailed by the first week in January. But the fastest way to get additional federal tax forms, instructions and IRS publications is through your computer, via the Internet. On the World Wide Web, go to http://www.irs.ustreas.gov and then print out what you need. To get printouts, download Adobe Acrobat Reader from the IRS Web page first (www.adobe.com/prodindex/acrobat). You can still order forms and publications by phone, but expect to wait about two weeks before you receive them. Call 800-TAX-FORM between 7:30 a.m. and 5:30 p.m. weekdays. (In Alaska and Hawaii, the hours are Pacific standard time.) And of course, you can always get forms the old-fashioned way: by visiting your local IRS office or selected post offices and libraries.

--Get free tax tips from the IRS. True, the IRS' taxpayer assistants aren't always as reliable as a C.P.A. or tax attorney (see "MONEY Audits the IRS" on page 78). But you can't beat the price. Free advice is available by calling your local IRS office or 800-829-1040 and speaking to an IRS representative--assuming you can get through to one. You can also get recorded tax information 24 hours a day, seven days a week, on about 150 topics from "Who Must File" to "Sale of Home" through Tele-Tax (800-829-4477). By calling the IRS, you might learn that penalties paid on early withdrawal of savings, such as from a CD, are deductible on the 1040 under Adjustments to Income. If you wrote off a $300 penalty, you'd shave $84 off your tax bill assuming you're in the 28% bracket.

When you're in no hurry but want to be sure of receiving an answer, send a written question to your IRS district director (call the IRS at 800-829-1040 for the address). The IRS pledges to answer within 30 days. Bear in mind that you can--and should--fight back if you wind up getting a wrong answer from the IRS that costs you money. In a recent Money poll, 59% of taxpayers who got inaccurate advice from the IRS battled the agency, and 64% of them won.

--Surf the Internet for tax Websites. We found three that could help lower your 1996 income taxes:

TaxSites. Looking for the rabbit hole that leads to all tax information on the Internet? Search no further than this list of tax-related sites compiled by San Francisco tax preparer Frank McNeil (www.best.com/~ftmexpat/html/taxsites.html). You'll find routes to recent newspaper and magazine articles, newsgroups, newsletters, tax education providers, legal resources, tax software makers and federal and state tax forms.

The IRS Home Page. Colorful and good-humored, this site (www.irs.ustreas.gov) provides the latest tax information for individuals and businesses, popular tax topics such as "Can You Claim the Child and Dependent Credit?" and a guide to filing a tax return using your PC. As mentioned earlier, it's also the storehouse of almost every federal tax form and IRS instruction booklet, all in downloadable form.

The Tax Prophet. Another San Francisco tax attorney, Robert L. Sommers, dishes up taxes in an entertaining way--honest!--on a "cyberjourney" that contains his tax articles published in the San Francisco Examiner and answers to common tax questions (www.tax prophet.com). Just click on the crystal balls to get The Prophet's "Taxpayer vs. the IRS" slant on such topics as the Taxpayer Bill of Rights II law and joint tenancy, plus 12 tax tips to consider before filing your '96 return. For taxpayers who intend to sell inherited stock, for instance, he reminds you that you base your tax liability on the fair market value of the stock on the day the donor died, so you'll never have to pay tax on the gain made during the donor's lifetime. For a stock that's appreciated by $2,500, this frees you from a $700 capital-gains bill if you're in the 28% bracket or higher.

--Take a fresh look at savings bonds for college. In 1988, Congress passed a law that let some people escape federal income tax on the interest from Series EE bonds used to pay college tuition for themselves, their children or their spouses. The tax exclusion was phased out for couples with AGIs of $60,000 to $90,000, and the law clearly stated that this range would be adjusted upward each year for inflation. Sloppy wording in the 1993 tax law, though, fouled up the adjustments for the past three years, leaving many parents holding bonds that didn't qualify for the tax break. Thankfully, the law was fixed in '96. So starting with 1996 returns, the benefit phases out for joint filers with adjusted gross income between $74,200 and $104,200 (vs. $65,250 to $95,250 under the old law) and for singles whose income is between $49,450 and $64,450 (vs. $43,500 to $58,500 previously). In '97, the phaseout ranges bump up again, this time to $76,250 to $106,250 for married couples and $50,850 to $65,850 for singles.

Moreover, the new law retroactively adjusts the phaseout ranges for 1993, 1994 and 1995. If you didn't exclude some or all of the interest on EE bonds you spent for college in those years because your income exceeded the phaseout ranges then on the books, now's the time to file a 1040X amended tax return to claim a refund. The new phaseout ranges for those years for joint filers are $68,250 to $98,250 in '93, $70,350 to $100,350 in '94 and $72,150 to $102,150 in '95. For single filers, the new phaseout ranges are $45,500 to $60,500 in '93, $46,900 to $61,900 in '94 and $48,100 to $63,100 in '95.

WAYS TO SAVE ON YOUR '97 TAXES AND BEYOND: USE THE NEW TAX BREAKS

Once you've done all you can to lower your 1996 federal income tax bill, start thinking about the future. You'll want to take full advantage of the welcome assorted new tax breaks that will go into effect Jan. 1, 1997. (For more details on them, see Your Taxes in our December 1996 issue. You can find it on Money's Website at money.com.)

Below we've outlined four tax-smart strategies to boost your savings plus your business and health-care dollars in the years ahead. We also show you how to get a little something extra for a 1997 vacation too.

--Contribute more to your Individual Retirement Account. Starting Jan. 1, 1997, a husband and wife can each contribute up to $2,000 to an IRA, even if one of them doesn't work for pay. In the past, one-earner couples were limited to a combined annual contribution of just $2,250.

If you're eligible to deduct your full IRA contributions, deciding to max out is a no-brainer: In addition to bolstering your retirement stash, a deductible $4,000 contribution will shave $1,120 off your '97 tax bill if you're in the 28% bracket (taxable income of $41,201 to $99,600) vs. the $630 you'd save under the old law. To deduct your contribution, the working spouse must not be covered by a retirement plan at work; if he or she is covered, you get the full deduction only if your combined AGI is $40,000 or less.

If you can't write off your IRA, first contribute the maximum to the working spouse's pretax employer-provided retirement opportunities, like a 401(k) or 403(b) plan. Then consider funding a nondeductible IRA, since your contribution will still grow tax deferred.

--Buy a big sport utility vehicle, instead of a fancy sedan, for business. You can get around the depreciation limits on luxury cars used for business by buying a sport utility vehicle like a Chevy Suburban or a Toyota Land Cruiser, as long as it weighs more than 6,000 pounds. Reason: The IRS doesn't classify sport utilities as cars. Thus you can fully depreciate the vehicle in just five years. In contrast, luxury-car buyers are limited to total depreciation of $14,460 over five years and $1,775 for each succeeding year until you have recovered the entire cost of the car attributable to business use. As an added kicker, sport utility vehicles aren't subject to the 8% federal luxury tax slapped onto the price of cars costing more than $36,000. "If you know the rules, you can drive the car you want and cut your taxes at the same time," says Richard Joslin, a tax partner at Goldstein Golub Kessler in New York City.

--Be a pioneer: Consider opening a medical savings account. Under a pilot program that begins in '97, as many as 750,000 people will be able to open a tax-favored medical savings account (MSA). To qualify, you must be self-employed or the employee of a firm with 50 or fewer workers. In addition, the MSA must be coupled with a high-deductible insurance policy. For single people, the insurance must carry a deductible of between $1,500 and $2,250; for a couple, the deductible will range from $3,000 to $4,500.

In general, here's how the MSA will work: You must make a tax-deductible contribution to your MSA of up to 65% of your annual insurance deductible if you're single and as much as 75% if you have dependents. Your MSA contributions and their earnings grow tax deferred and can be withdrawn tax-free, as long as you use the money to pay for unreimbursed medical costs you incur before reaching your deductible. If you withdraw your MSA money for nonmedical reasons or to buy additional health insurance, however, you'll owe income tax plus a 15% tax penalty on the payout. If you don't spend your entire MSA balance in 1997, you can roll over what's left into 1998 and later years. At age 65, you can withdraw the balance of your account for any reason without a penalty, but the amount will be taxed at your regular income tax rate.

Bear in mind, however, that the specifics of the policy coupled with your MSA will vary by insurer: The tax law will let you withdraw MSA money for a wide variety of medical purposes, but your insurer might not count them all against your deductible. So you could conceivably deplete your MSA paying for health expenses and find that your account is empty when you're facing an expensive illness. Even if you use your MSA to pay most or all of your deductible, your insurance policy might not cover 100% of your costs. So you would have to shell out after-tax dollars to cover expenses in addition to your deductible.

Those warnings aside, MSAs may prove to be a good value, explains Susan Jacksack, a small business analyst for CCH, a Chicago publisher of tax information: "If I were a small business owner with no health insurance, I would sign up without hesitation. There is a potential to save a lot of money." To find an MSA if you're self-employed, call an independent insurance agent.

--Take a tax-smart vacation. The 10% federal excise tax on domestic air tickets will expire on New Year's Day 1997. Although the lapse is expected to cost the government some $400 million a month, congressional budget wrangling virtually ensures that the tax won't be reinstated until March at the earliest. So if you buy your airline tickets before then, you can start your vacation break with a 10% tax break.