8 ways to drive down your 2010 tax bill

The year 2010 is now over. But as you tackle your Form 1040 for the 2010 tax year, you can still find ways to keep that final bill down for your income of last year.
Here are eight tips to keep in mind.
1. Find your records. Locate every single scrap of paper or e-mail that's potentially tax-relevant before you sit down to fill out the IRS forms or take your papers to an accountant.
"Organization doesn't have to be fancy," says CPA Terry Rice. "Just have a place for everything, a place so easy to get to that you'll actually use it for receipts and for all those tax statements that come in after the first of the year."

2. Make a list of every possible deduction and the specific record that backs it up. If you've planned and executed a personal tax plan for 2010, you'll have completed key elements of it by midnight on New Year's Eve. For some people, this included making the maximum allowed contribution to a tax-deferred retirement account and making all planned charitable deductions before year's end. For other taxpayers, it included deferring the collection of certain income until 2011, so as to put off paying taxes on it, or paying deductible expenses in 2010, even though they weren't due until 2011, so as to get a tax break on them.

3. If you're not already itemizing deductions, use the list you've assembled to decide whether you should be. If you're paying mortgage interest and property taxes on your home, or have other tax-deductible expenses, you may well save on taxes by itemizing instead of claiming the standard deduction. But be careful — deduction rules are complicated. Make sure you're claiming only qualified write-offs.

4. Take a partial write-off on investment losses. If you lost money on investments in 2010, you can use the loss to offset capital gains on investments that rose in value. Even if you have no gains, you may still deduct up to $3,000 of your losses each year to offset ordinary income. If you have more than $3,000 in losses, you can carry the excess forward to deduct in future tax years. Although this may not be enough to fully recoup your investment loss, it will help by reducing your tax bill.

5. Make the smart choice between deducting state income tax or state sales tax. Tax law allows you to deduct one or the other. If you live in a state that taxes income, the income tax deduction is probably best for you. But if you bought a big-ticket item like a vehicle, boat or airplane during the year, deducting the state sales tax might be better. Do the math, then decide.

6. Remember those special energy credits. Tax credits are better than tax deductions because they are a direct dollar-for-dollar reduction in your bottom-line tax bill. For 2010, especially generous ones are available: You are allowed a 30 percent credit of what you paid during the year to outfit your primary residence with certain energy-saving skylights, windows, roofs, furnaces, water heaters and central air-conditioning units, up to a maximum credit of $1,500. In 2011, credits for spending on these items are much less generous, but of course you will save energy as well. A taxpayer who owes no federal income tax for 2010 does not qualify for an energy tax credit.

7. Remember those reinvested dividends. Technically, this isn't a deduction, but it can help reduce your tax bill.
If you own mutual funds that automatically invest dividends in extra shares, keep in mind that each reinvestment increases your "cost basis" in that fund. (Cost basis is the original price, plus fees, of an asset such as stocks, bonds and mutual funds.)
Adding the dividends to the cost basis will reduce the taxable capital gain (or increases the loss) when you redeem shares. If you forget to do this, you'll be overpaying your tax.
8. Use direct deposit for any refund. This won't affect the dollar amount of your taxes, but by opting for electronic transfer rather than a check, you'll have a shorter wait for any money that's due to you.