April 2011 may seem like a long time away, in the world of taxes it’s just right around the corner. What you do now could determine the kind of tax year you have in 2010. And with the number of lucrative tax benefits set to expire this year, there’s no better time to take action. Here are few ways you can cut this year’s income tax bill.
Keep your W-4 up-to-date

The benefits of 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 April 15.

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 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.

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 purchased a home in 2010, you may be eligible for the credit, but you must have signed contract by April 30, 2010 and closed 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 signed contract by April 30, 2010 and closed by June 30, 2010.

Make your home energy-efficient
This is a good time to invest in energy-efficient upgrades. If you install approved water heaters, exterior windows & doors, heating and cooling systems, roofing that reduce energy consumption, you can get a tax credit 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.

Mortgage Forgiveness Debt Relief Act
Under this Act: formerly a foreclosure may result in a large tax liability. Cancelled debt used to buy, build or improve your principal residence can be excluded from your income. The mortgager may issue a cancellation of debt from to you, but due to the provisions under this act they may be excluded by filing form 982.

Cancellation of Debt may also result in a taxable transaction to you, unless discharged through bankruptcy. All or part of the cancelled debt may be excluded from income if you can prove insolvency. The insolvency exclusion requires your total debt to exceed the total fair market value of your assets at the time the debt was cancelled. It is the amount in which your debt exceeds the fair market value of your assets that determines how much of the cancelled debt can be excluded.

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 gain losses to offset other income. But you don’t wait until the fall. The longer you wait, the less time you’ll have to make right matches.  

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 stock that shows 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, 2010. If you’re in the two lowest income brackets, your new rate will be 15%, up from the 0% it’s been since 2008.