the taxes I pay''? Unfortunately, the question is usually asked in February or March when it is too late to do anything about the prior year. Hence, the November and December columns will be devoted to year-end tax planning.

An important factor in tax planning is an understanding as to how the taxes are computed and what exemptions, exclusion and deductions are available to you. The following example assumes a married couple with two children and who have been residing in Bermuda for a full calendar year, with one spouse fully employed, and paying an annual rent of $24,100.

To start, the employed spouse is eligible for the earned income exclusion of $70,000. The foreign housing exclusion in 1996 would be $15,000, The standard deduction for married filing joint is $6,700 and each individual is entitled to an exemption of $2,550. Thus, the first $85,000 of earned income and the next $16,900 of either earned or investment income is not subject to tax.

Earned income exclusion $70,000 Foreign housing exclusion 15,000 Standard deduction 6,700 Personal exemptions 10,200 Total $101,900 Hence, the first $101,900 of income would not be subject to any tax. The next $40,100 of income is only subject to a tax rate of 15%. Thereafter, ordinary income rates progressively increase from 28% to 39.6%.

Capital Gains and Losses: Short-term capital gains are taxed at ordinary income rates. The maximum tax rate on net long-term capital gains is 28%. Expatriates can take advantage of this spread by realising capital gains in 1996 and paying tax at 28%, while deferring higher-taxed regular income to 1997. This strategy will be effective if you expect to be in a lower tax bracket next year.

The required holding period for long-term capital gain treatment is one year and one day. The holding period is measured from trade date to trade date. The holding period is significant when a taxpayer is in the 31%, 36% or 39.6% tax brackets. Short-term gains would be taxed at these higher rates, but net (long-term) capital gains would be taxed at only 28%.

Capital losses first offset capital gains. Short- and long-term capital gains and losses must be offset against one another to produce a net short- and long-term figure. After that, the results are combined to arrive at a final short -- or long-term gain or loss for the year.

Net capital losses are fully deductible, against ordinary income, up to a $3,000 annual limitation. Excess capital losses may be carried forward to future years.

Options: For the sophisticated investor, dealing in options can offer timing advantages for tax purposes because the premium becomes taxable only upon the close of a position by exercise, expiration or a closing transaction. the premium income is considered a short-term capital gain if the option expires unexercised.

If you trade stock options, you might consider buying or selling put and call options that do not involve straddles. If you trade options that expire in January, you have the flexibility to close out the position before year end if you have a loss and use that loss to offset income in 1996. If the position shows a profit you can keep it open until January and realise the gain in 1997.

Strategies: If your current short or long-term losses currently exceed gains, sell stocks for the gain up to the $3,000 loss offset you are allowed against ordinary income. Taxes are saved at your highest marginal tax bracket.

Lock in your gains now, but postpone the tax by selling short against the box and buying "put'' options. Deliver stocks to cover the short sale in 1997.

If your situation is similar to the example at the beginning of this column, sell appreciated securities and have them taxed at the 15% tax rate. The 28% tax rate on capital gains is the maximum tax rate, not the minimum. You can always repurchase the stocks immediately without incurring a tax penalty.

Charitable Contributions: To be able to take a contribution to a charity as an itemised deduction, the contribution must generally be to a US charity. While this requirement would usually limit the charitable deductions for a US citizen residing in Bermuda, we understand that a contribution to the International Charitable Fund of Bermuda, Inc. meets the eligibility rules.

Capital Gain On Sale of Your Principal Residence: If you or your spouse is age 55 or older, you may qualify for a once-in-lifetime capital gains exclusion of up to $125,000 in profits from the sale of your home. To qualify, generally, you must have owned the home and used it as your principal residence for at least three out of the five years prior to the sale.

Tax advice If you own your home jointly and claim the exclusion, neither of you can ever take it again, even if you divorce and remarry and your new spouse has never claimed the exclusion.

If you sell your principal residence, you can defer payment of tax on the profit if you buy another home of equal or greater value within 2 years (4 years if you reside out side the United States) after the date of the sale.

Interest and Dividends: If a taxable bond or CD is purchased between payment dates, the amount of interest earned on that bond from the last payment date to the dater of purchase is added to the purchase price as accrued interest. No adjustment to the bond's cost basis is made as a result of this payment.

When the next coupon or payment date arrives and the full interest payment is received, the purchaser should subtract the amount of accrued interest paid in order to arrive at the amount of interest income that is actually taxable for that period. The seller of the bond treats the accrued interest received as taxable income.

For interest earned on tax-exempt bonds between payment dates, the above procedure can be followed so that the purchaser can report (for informational purposes only) the proper amount of tax-exempt interest received on his or her federal income tax return.

If you pay a premium to purchase a taxable bond, the amortisable bond premium is treated as an offset to interest income on the bond.

On tax-exempt bonds, the premium must be amortised over the life of the bond.

The premium cannot be deducted because it is an expense of earning tax-exempt interest. The basis of the tax-exempt bond is reduced by the amount of premium attributable to the period for which the bond is held. If the bond is held to maturity, no capital loss will result from the purchase of a tax-exempt bond at a premium.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant about how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Services, P.O. Box 617, Bernardsville, NJ and is associated with Gulfstream Financial Ltd. In Bermuda.