April 2012 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 2012. 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

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. 2011 you may be able to deduct qualified tuition and related expenses that you pay for yourself, your spouse, or a dependent, as a tuition and fees deduction. You can claim qualified tuition and fees as either: (1) a tuition and fee deduction; (2) a Hope or Lifetime Learning credit; or (3) if applicable, a business expense. You do not have to itemize to claim qualified tuition and fees unless you claim them as a business expense.

Make your home energy-efficient
You still have time to make energy-saving and green-energy home improvements and qualify for either of the two home energy credits. 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 10% of the costs.

The credit can also be claimed for labor costs if certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.                  

The credit has a life time limit of $500, of which only $200 may be used for windows. If the total of the nonbusiness energy property credits taken in prior years since 2005 is     more  than $500, the credit may not be claimed in 2011.
Qualifying improvements must be placed into service to the taxpayer’s principle residence located in the United States before January 1, 2012.

Homeowners going green investing in alternative energy equipment, the credits equals 30% of what a homeowner spends on qualifying property  such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

No gap exists on the amount of credit available except fuel cell property.
Generally, labor cost  are included when figuring this credit.

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 form 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. The laws are extended, 2012 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.