Make smart moves now to lower your tax bill

It may seem an odd time of year to think about your taxes.

But taking some steps before Dec. 31 can help minimize the amount you'll owe or maximize your refund.

The tax code has a few new items this year, including the well-publicized first-time homebuyer's credit and a sales-tax credit for new-car buyers. There's also time to use more traditional strategies for maximizing deductions and minimizing income to lower your tax bill next April.

Here are a few tax-smart moves you can make:

• Check your withholding.

The "Making Work Pay" credit included in the stimulus bill last spring put a little more money in your paycheck, but it also may drive up your tax bill.

Designed to get money flowing into the economy, this credit reduced the amount of tax withheld from paychecks.

But if you are a high-income earner, you typically owe taxes or you usually get just a small refund, you should check to make sure you're having enough tax withheld while there's still time to adjust it if necessary.

The $400 credit ($800 for married people filing joint returns) starts phasing out for people who earn $75,000 ($150,000 for joint filers). For those taxpayers, along with people who ordinarily owe taxes, the boost could translate into a higher tax bill, so it's worth doing some quick calculations to see if you should adjust withholding for the rest of the year.

There's a calculator that will help you figure out if you need to adjust withholding on the IRS Web site.

Withholding adjustments also can help those who pay estimated tax avoid underpayment penalties. .

• Maximize your credits and deductions.

If you plan to buy a house, try to set the closing date before Dec. 1 to qualify for the first-time homebuyer's credit.

The name of the credit is slightly misleading -- anyone who has not owned a home in the past three years is eligible to claim the $8,000 credit, as long as the purchase is completed before Dec. 1.

The credit may be claimed on a 2009 return when it's filed next spring, or a homebuyer can amend a 2008 return and get the credit right away.

Prospective car buyers also can benefit from making a purchase before the end of the year. Sales tax paid on new cars that cost up to $49,500 is deductible, and there are credits available for certain hybrid and electric cars.

Credits are also available for certain energy-efficiency improvements to homes. Installing efficient insulation, windows, doors, roofs, heat pumps, hot-water heaters or boilers can produce a credit of up to $1,500. This credit will last through 2010.

Additional credits are available for up to 30 percent of the cost for installing solar, wind, geothermal or fuel-cell equipment.

There's time to maximize deductions for medical expenses. A deduction is allowed for total medical-care expenses that exceed 7.5 percent of adjusted gross income.

• Give to charity.

Charitable contributions can only be deducted if you have receipts to back them up, so money dropped in the collection plate is no longer deductible. If you are missing a receipt, now's the time to track it down.

Taxpayers who are 70½ or older can contribute up to $100,000 from their IRAs directly to charity without having to claim the money as income. .

• Review your flexible-spending accounts.

If your employer offers a health flexible-spending account, you should take advantage of it to get tax-free reimbursement for out-of-pocket medical expenses, including nondeductible costs like nonprescription medicines and first-aid supplies.

Review your spending for this year, and make sure you're contributing enough to cover your expenses for 2010 if you are enrolled in an FSA.

One important thing to remember is that FSAs require you to spend all the money in them before the end of the year.

• Convert your traditional IRA to a Roth IRA.

While the stock market has recovered some of its losses, it's still down significantly, so now may be a good time to covert a traditional IRA to a Roth IRA.

In a traditional IRA, the money is tax-free when deposited but taxed as income when withdrawn. Roth IRAs work the opposite way, with tax paid upfront while withdrawals go untaxed.

So if you have a lower balance in your traditional IRA, and you convert it to a Roth, you'll pay lower taxes than if you wait to convert when the market fully recovers.

• Defer income, if possible.

If you expect a year-end bonus, asking your employer to cut the check in January could reduce your income and keep your taxes lower.