Upper-income older families should make these moves throughout the year to keep their bill low at tax time. Here are the areas where you should look for savings:

At work
Car and home
Charitable contributions
Estate planning
Inheritance
Investments and retirement savings
Medical expenses
Rental property
Your children

AT WORK

Give yourself a raise. The odds are high that you're having too much tax taken out of your paycheck every payday. The evidence is clear if you have a big refund coming. About 90 million of the returns filed in 2006 called for refunds averaging more $2,200. Filing a new W-4 form with your employer (get one from your payroll office) will insure that you get more of your money when you earn it. See our easy-to-use withholding calculator to help you figure how many allowances you should claim. Suggest that your husband or wife do the same. If you're just average, you deserve almost $200 a month extra.

Take advantage of your flex account. Be aggressive if your employer offers a medical reimbursement account -- sometimes called a flex plan. It lets you divert part of your salary to an account, which you then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money -- and that can save you 20% to 35% or more compared with spending after-tax money.

Watch start-up costs. Generally, the costs of starting up a new business must be amortized, that is, deducted over years in the future. But you can deduct up to $5,000 of start-up costs in the year you incur them, when the tax savings could prove particularly helpful.

Stash cash in a self-employed retirement account. If you have your own business, you have several choices of tax-favored retirement accounts, including Keogh plans, Simplified Employee Pensions (SEPs) and individual 401(k)s. Contributions cut your tax bill now while earnings grow tax-deferred for your retirement.

Pay tax sooner than later on restricted stock. If you receive restricted stock as a fringe benefit, consider making what's called an 83(b) election. That lets you pay tax immediately on the value of the stock rather than waiting until the restrictions disappear when the stock "vests." Why pay tax sooner rather than later? Because you pay tax on the value at the time you get the stock, which could be far less than the value at the time it vests. Tax on any appreciation that occurs in between then qualifies for favorable capital gains treatment. Don't dally: You only have 30 days after receiving the stock to make the election.

Pay back a 401(k) loan before leaving the job. Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you're younger than 55, hit with a 10% penalty, too.

Cut compensation, boost dividends. Principals in closely held businesses may want to shift part of their compensation from salary (which is taxed in their top bracket) to dividends (which is taxed at a maximum 15% rate). This can pay off if the corporation is in a low tax bracket, so the loss of the deduction for dividends paid is more than offset by the owner's savings.

Don't be afraid of home-office rules. If you use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs. Some home-business operators steer away from these breaks for fear of an audit. But if you deserve them, claim them.

Time receipt of self-employment income. Those who run their own businesses have a lot of flexibility at year-end. To push the receipt of income into the following year, delay mailing bills to clients until late December so that payment is received after December 31. Or, pay business expenses before January 1 to lock in deductions.

Pay estimated taxes ... or not. If you receive significant income not subject to withholding -- from self-employment or investments, for example -- you probably need to make quarterly estimated tax payments to avoid an IRS penalty. But, if withholding will equal 100% of your 2007 income tax bill (or 110% if your income was over $150,000), you don't need to make estimated payments ... no matter how much extra income you make this year.

CAR AND HOME

Take Uncle Sam for a ride. You can drive away with a credit that will reduce your tax bill dollar for dollar if buy a gasoline/electric hybrid before December 31, 2010. The size of the tax credit depends on how fuel stingy your new car is, but the savings can range from several hundred dollars up to $3,400.

Convert a vacation home to your principal residence. It's perfectly legal to sell your home, claim tax-free profit and then move into a vacation property. After you have lived in that home for two years, you can sell and claim tax-free profit again ... including appreciation from the days it was a vacation home.

Make the most of tax-free home-sale profit. Up to $250,000 of home-sale profit is tax free ($500,000 if you are married and file a joint return) if you own and live in the house for two of the five years leading up to the sale. If you are bumping up on the limits, consider selling and buying a new home to start the tax-free clock ticking again. There is no limit on the number of times you can claim tax-free profit on the sale of a home.

Don't underestimate the cost of home-equity debt. Generally, interest on up to $100,000 of debt secured by your home can be deducted, no matter what you use the money for. But if you are among the growing number of taxpayers subjected to the alternative minimum tax (AMT), home-equity debt is only deductible if the loan was used to buy or improve your home.

Use an installment sale of real estate to defer a tax bill. If the buyer pays you in installments, the IRS will let you pay the tax bill on your profit in installments, too. You must charge interest on the deal, and each payment you receive will have three parts: interest (taxable at your top rate), capital gain (taxed at a maximum of 15%) and return of your investment (tax-free).

CHARITABLE CONTRIBUTIONS

Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity. Add such costs with your cash contributions when figuring your charitable contribution deduction.

Put away your checkbook. If you plan to make a significant gift to charity , consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, and you never have to pay tax on the profit.

Give away an IRA. After age 70½, you must withdraw a minimum from your IRA each year, even if you don't need the money. You can meet that obligation by directing that up to $100,000 go directly to a charity. You don't get a deduction, but you don't have to pay taxes on the payout, either.

Be creative with your generosity. A charitable-remainder trust can avoid capital gains taxes on appreciated assets, allow you to receive income for life and receive a tax deduction now for a charitable contribution that will be made after your death. A charitable-lead trust can avoid taxes on appreciated assets, earn an immediate tax deduction and still provide an inheritance for your heirs later. A donor-advised fund can earn you a tax deduction for the full value of appreciated assets now, even though you don't have to determine the recipients of your generosity until later years.

ESTATE PLANNING

Protect your heirs. Be sure beneficiary designations for your IRAs are up to date. If your IRA goes to your estate rather an a designated beneficiary, unfavorable withdrawal rules could cost your heirs dearly.

Death and taxes. Someone who is terminally ill may want to sell investments that show a paper loss. Otherwise, the "tax basis" of the property -- the value from which the heir will figure gain or loss when he or she sells -- will be "stepped-down" to date-of-death value, preventing anyone from claiming the loss. If you want to keep property, such as a vacation home, in the family, consider selling to a family member. You get no loss deduction, but it could save the buyer taxes later on.

Double your family's estate-tax break. If yours is among the minority of families that has to worry about the federal estate tax, realize that planning ahead can save your heirs a fortune. A simple plan employing what's called a "by-pass trust", for example, can double from $2 million to $4 million the amount you can pass tax free to the next generation.

Give it away. Money you give away during your lifetime won't be in your estate to be taxed at your death. That's one reason there's also a federal gift tax. But the law allows you to give up to $12,000 each year to any number of people without worrying about the gift tax. If your spouse agrees not to give anything to the same person, you can give $24,000 a year. If you have four married children, for example, and you give $24,000 to all eight children and in-laws, you can shift $192,000 out of your estate gift-tax free each year.

INHERITANCE

Pinpoint the stepped-up basis of property you inherit. In most cases, the tax basis of inherited property -- that's the value from which you will figure gain or loss when you sell -- is "stepped up" to the value on the day the previous owner dies. Tax on all appreciation during his or her lifetime is forgiven. If you will inherit assets in 2008 (or did in 2007), be sure you pinpoint your basis so you don't overpay your tax later. Taxpayers who know about this break save billions of dollars each year.

Roll over an inherited 401(k). If you are named a beneficiary of a 401(k) plan, take advantage of a new rule that arrives in 2007. For the first time, non-spouses can roll over the account into an IRA and stretch payouts (and the tax bill on them) over your lifetime. This can be a tremendous advantage over the old rules that generally required such accounts be cashed out, and all taxes paid, within five years or fewer.

INVESTMENTS AND RETIREMENT SAVINGS

Check the calendar befor you sell. You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The "holding period" starts on the day after you buy a stock, mutual fund or other asset and ends on the day you sell it.

Don't buy a tax bill. Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you'll owe tax on the amount. Buy after the payout, and you'll get a lower price, and no tax bill.

Scour your portfolio for paper losses. Never make investment decisions solely for tax reasons, but the prospect of realizing a money-saving tax loss might be the impetus you need to unload a loser. If you incur losses during the year, ask yourself if it's time to take some money off the table by selling stocks or mutual funds that have enjoyed healthy run-ups in value. Offsetting losses could make your gains tax-free.

Tell your broker which shares to sell. Doing so gives you more control over the tax consequences when you sell stock. If you fail to specifically identify the shares to be sold, the tax law's FIFO (first-in-first-out) rule comes into play, and the shares you've owned the longest (and perhaps the ones with the biggest gain) are considered to be sold. With mutual funds, an "average basis" can be used when determining gain or loss; but that alternative isn't available for stocks.

Ask your broker for a favor. The law allows investors to deduct a loss on a worthless security, but only if you can prove the stock is absolutely worthless. If you own stock you're sure isn't coming back, ask your broker to buy it from you for a nominal amount. You can then report the sale and claim your loss.

Consider tax-free bonds. It's easy to figure whether you'll come out ahead with taxable or tax-free bonds. Simply divide the tax-free yield by 1 minus your federal tax bracket to find the "taxable-equivalent yield." If you're in the 33% bracket, your divisor would be 0.67 (1 - 0.33). So, a tax-free bond paying 5% would be worth as much to you as a taxable bond paying 7.46% (5/0.67).

Mine your portfolio for tax savings. Investors have significant control over their tax liability. As you near the end of the year, tote up gains and losses on sales to date and review your portfolio for paper gains and losses. If you have a net loss so far, you have an opportunity to take some profit tax free. Alternatively, a net profit on previous sales can be offset by realizing losses on sales before the end of the year.

A bond swap may pay off. It's a fact of life: As market interest rates rise, bond values fall. If you have bonds that have lost value, consider a bond swap. You sell your losers, cash in the tax loss and invest the proceeds in higher-yielding bonds to maintain your income stream.

Think twice about selling stock for a profit if you're subject to the AMT. Although long-term capital gains benefit from the same 15% maximum rate under both the regular tax rules and the alternative minimum tax, a capital gain can effectively cost more than 15% in AMT-land. The special AMT exemption is phased out as income rises so, for example, a $1,000 capital gain can wipe out $250 of the exemption, effectively exposing $1,250 to tax. That means your tax bill rises by more than $150 for that $1,000 gain.

Keep a running tally of your basis. For assets you buy, your "tax basis" is basically how much you have invested. It's the amount from which gain or loss is figured when you sell. If you use dividends to purchase additional shares, each purchase adds to your basis. If a stock splits or you receive a return-of-capital distribution, your basis changes. Only by carefully tracking your basis can you protect yourself from overpaying taxes on your profits when you sell.

Beware of Uncle Sam's interest in your divorce. Watch the tax basis -- that is, the value from which gains or losses will be determined when property is sold -- when working toward an equitable property settlement. One $100,000 asset might be worth a lot more -- or a lot less -- than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.

Undo a Roth conversion gone bad. When you convert a traditional IRA to a Roth, you must pay tax on the amount you convert. But what if the investments in the new Roth IRA fall in value? You get a chance for a do-over. You have until October 15 of the year following the conversion to "unconvert" and avoid paying tax on the money that evaporated. You can then redo the conversion the following year.

Time claiming Social Security benefits. If you stop working, you can claim benefits as early as age 62. But note that each year you delay -- until age 70 -- promises higher benefits for the rest of your life. And, delaying benefits means postponing the time you'll owe tax on them.

Prepare for a Roth IRA conversion. Under current law, you can't convert a traditional IRA to a Roth IRA if your adjusted gross income for the year is more than $100,000 (on an individual or joint return). But, that restriction disappears in 2010. Such a conversion could be a terrific tax saver for you because withdrawals from Roth IRAs are tax-free in retirement. If you're interested, start saving now to pay the cost of the conversion in 2010.

Dodge a 50% tax penalty. Taxpayers over age 70½ are required to take minimum withdrawals from their IRAs each year. Failing to do so subjects them to one of the toughest penalties in the tax law: The IRS claims 50% of the amount that should have come out of the account. Your IRA sponsor can help pinpoint the amount of the required payout.

MEDICAL EXPENSES

Keep careful records of medically necessary improvements. To the extent that such costs -- for adding a wheelchair ramp, for example, lowering counters or widening a doorway or installing hand controls for a car -- exceed any added value to your home or vehicle, that amount can be included in your deductible medical expenses.

Include travel expenses in medical deductions. In addition to the cost of getting to and from the doctor, you can deduct up to $50 a night for lodging if seeking medical care requires you to be away from home overnight. The $50 is per person, so if you travel with a sick child to get medical care, you can deduct $100 a day. As with other medical expenses, you get a tax benefit only to the extent your expenses exceed 7.5% of adjusted gross income.

Crank in the value of deducting long-term care premiums. As you shop for long-term care insurance, remember that a portion of the cost is deductible. The older you are, the more you can write off. For employees, this is a medical expense, which means it only saves money if your medical expenses exceed 7.5% of your adjusted gross income. If you're self-employed, you avoid the 7.5% restriction and get this deduction even if you don't itemize.

RENTAL PROPERTY

Take advantage of tax-free rental income. You may not think of yourself as a landlord, but if you live in an area that hosts an event that draws a crowd (a Super Bowl, say, or major golf tournament), renting out your home temporarily could make you a bundle -- tax free -- while getting you out of town when tourists overrun the place. A special provision in the law lets you rent a home for up to 14 days a year without having to report a dime of the money you receive as income.

Stay actively involved in rental real estate. Generally, anti-tax-shelter legislation prevents losses from real estate investments from being deducted against other kinds of income. But, if you are actively involved in a rental activity, you can deduct up to $25,000 of such losses ... if your adjusted gross income is less than $100,000. You don't have to mow grass and unclog toilets to qualify as actively involved; but you should make sure you're involved in setting rents and approving tenants and management firms.

Use a tax-free exchange to acquire property. By trading one rental property for another, for example, you avoid the capital gains taxes you'd incur if you sold the first property ... leaving you with more to invest in the second.

YOUR CHILDREN

Fund a Roth for you child or grandchild. As soon as a child has income from a job -- such as babysitting, a paper route, working retail -- he or she can have an IRA. The child's own money doesn't have to be used to fund the account (fat chance that it would). Instead, a generous parent or grandparent can provide the funds, or perhaps match the child's contributions dollar for dollar. Long-term, tax-free growth can be remarkable.

Help your children earn credit for retirement savings. This credit can be as much as $1,000, based on up to 50% of the first $2,000 contributed to an IRA or company retirement plan. It's available only to low-income taxpayers, though, who are often the least able to afford such contributions. Parents can help, however, by giving an adult child (who cannot be claimed as a dependent) the money to fund the retirement account contribution. The child not only saves on taxes but also saves for his or her retirement.

See All Tax Savings Strategies

RETURN TO TAX CENTER