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  03-19-2010, 02:21 AM
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A new year is here and with it, new tax laws. Here are some suggestions about the best ways to navigate those new laws to make sure 2010 is your best tax year ever.

While April 2011 may seem like a long time away, in the world of taxes it’s just around the corner. What you do now could determine the kind of tax year you have in 2010. And with a number of lucrative tax benefits set to expire this year, there’s no better time to take action.
Here are 8 ways you can cut this year’s income tax bill.
1. Keep your W-4 up-to-date
The benefits of the Making Work Pay tax credit will be available one last time this year. This is the credit wage earners have been receiving in their paychecks through reduced withholding. Unless it’s renewed by Congress, the credit will expire on December 31, 2010.
Some wage earners will need to revisit their W-4s twice this year to ensure that the right amount of tax is withheld—once to increase their withholdings and again at year’s end to reinstate prior withholding after the credit expires. Proper withholding will prevent you from being surprised by an unexpected tax bill come April 15.
2. Take advantage of all possible deductions
Taxpayers overlook many deductions. People who don’t itemize their deductions often wrongly assume they don’t qualify for any. Actually, there are some deductions available even to people who take the standard deduction.
Among the overlooked deductions are out-of-pocket expenses incurred while doing charity work, moving expenses for a new job (you don’t need to itemize to get this deduction), and the real estate tax deductions for taxpayers who don’t itemize their deductions.
On the other hand, don’t take for granted that a deduction from last year is still available. Congress allowed many of them, like the $4,000 deduction for college tuition, to lapse at the end of 2009. Check the 2010 rules now to make sure the deduction you’re counting on is still available.
3. Take your bonus now
Since 2001, taxpayers have been getting a major tax break in the form of reduced income tax rates. These lower rates, a reduction of 2% to 3.5% from previous rates, will continue in 2010.
But unless they’re extended, the rates are set to expire on December 31, 2010. So now is the time to take that bonus or any higher fees or additional salary you have coming to you so you can pay tax at the lower rate.
4. Give yourself some credit
Some First-Time Homebuyer Credit, that is. This is another program set to expire on December 31, 2010, unless Congress extends it. If you purchase a home in 2010, you may be eligible for the credit, but you must have a signed contract by April 30, 2010 and close on or before June 30, 2010.
The credit is equal to 10% of the purchase price of the house, up to a maximum of $8,000. Even mobile homes and travel trailers may be eligible. In any case, the credit applies only to a primary residence, not a vacation home.
Not a first-time homebuyer? No problem. There’s good news for you, too. Long-time homeowners buying a replacement home in early 2010 may qualify for a credit of up to $6,500, but must also have a signed contract by April 30, 2010 and close by June 30, 2010.
5. Make your home energy-efficient
This is a good time to invest in energy-efficient upgrades. If you install approved water heaters, windows, roofing or heating and cooling systems that reduce energy consumption, you can get a tax credit of up to 30% of the costs, up to a maximum of $1,500.
However, tax credits for some purchases are only available in 2010. If you just can’t pay for an upgrade this year, don’t worry. Tax credits for some additional energy-efficient improvements will still be available from 2011 to 2016.
6. Convert to a Roth IRA
There’s never been a better time to consider converting to a Roth IRA. New rules allow people with any amount of income to convert a traditional IRA, 401(k) or other plan to the popular tax-free retirement plan.
But the conversion isn’t right for everyone. It’s best if you have a source other than your retirement plan to pay the tax that will be due and sufficient years before you need to take withdrawals from the account.
To encourage conversions, the IRS is offering a special incentive this year only. It will allow you to spread payment of the tax generated by the conversion over a 3-year period.
7. Consider taking some profits
This is an important tax year for long-term investors. Take a hard look at your portfolio and consider selling some of the stocks that show a profit.
The rate reductions on long-term capital gains that went into effect in 2003 are set to expire. Unless the laws are extended, 2010 will be your last chance to take advantage of these lower tax rates.
The rates are currently 15% for the upper four tax brackets and will revert to their 2008 level of 20% after December 31. If you’re in the two lowest income brackets, your new rate will be 15%, up from the 0% it’s been since 2008.
8. Play the "matchmaker game" with capital gains and losses
If you’ve sustained capital losses during this recession, take heart. They can be used to offset capital gains triggered by the recovery. Take a hard look at your portfolio. Consider how you can match one transaction against the other to reduce your tax burden.
Don’t forget that you’ll need to match long term against long term and short term against short term. If you’re facing a really big capital gain, consider selling some losers before year's end. Additionally, you can use up to $3,000 in capital losses to offset other income. But don’t wait until the fall. The longer you wait, the less time you’ll have to make the right matches.
The best tip of all is to stay informed on the ever-changing tax laws. New credits and deductions are introduced all the time. For more information on these tax tips and to stay up to date on all of the latest tax laws, visit our Tax Tips & Calculators page.
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