1. Defer income.
2. Accelerate expenses.
3. Search for all credits.

Let's take a closer look at each of these strategies.

Defer income
How can you defer income? Certain kinds of investments allow you to postpone paying taxes from the year in which the income is earned to a later year. Series EE savings bonds offer this feature, for instance.

Alternatively, if you buy certain six-month bank certificates of deposit (CDs) now, you can defer paying the tax on the interest until you file your return for the subsequent year. The CD must be the type on which the interest is neither credited to your account nor made available to you without substantial penalty before the maturity date.

An investment in U.S. Treasury bills provides a similar benefit. This is because the interest on them is not recognized until the bills are redeemed.

How about earned income? If you’re an employee who’s due a bonus, make sure it comes in January rather than December. Alternatively, if you’re self-employed, send out your billing later in the month so that you receive your checks after Dec. 31. I personally go on vacation the last two weeks in December. That way I can’t receive any checks until January.

If you’re self-employed, don’t forget to set up your Keogh plan before Jan. 1. The plan doesn’t have to be funded until your return is due, but the account must be set up this year or no contributions will be allowed.

Accelerate expenses
Accelerating certain expenses gives you an immediate tax benefit. You get to deduct the expenses from your taxes, even if you waited until Dec. 31 to make the purchase or write the check.

If you’re self-employed, buy your first three months of supplies for the next year in December. You can always use more stamps. Employees can accelerate employee business expenses as well. Pay any outstanding bills on Dec. 31. If you don’t have the cash, use your credit cards. The IRS gives you the deduction in the year of the charge, not when you actually pay the bill.

Investment expenses can also be accelerated. Renew your subscriptions to The Wall Street Journal, Barron's and TheStreet.com. While we’re in the investment arena, don’t forget to recognize any capital losses you may have incurred during the stock market’s recent swings. Capital losses can be used to offset any capital gains you may have had on a dollar-for-dollar basis, and up to another $3,000 to reduce your ordinary income. If you have losses that exceed $3,000, that money can then be carried forward to future years. If you think the stock will recover over time, sell now, recognize the loss, get the tax benefit, and then repurchase the stock next year. You must, however, wait 31 days after the sale to repurchase or your loss will be disallowed as a “wash sale.”

While we’re on capital assets, remember that the Internal Revenue Restructuring and Reform Act of 1998 reduced the holding period for long-term capital gains from 18 months to 12 months. That means any profits you make on investments sold after you've owned them 12 months will be taxed at 20% rather than your marginal tax rate.

Advance the payment of your charitable contributions. Many nonprofit organizations now accept credit cards for donations. The charity will appreciate the earlier receipt of the money and you get a deduction. Moreover, while we’re making these charitable contributions, don’t forget to empty your closets of old clothes, furniture and the like and donate them to a charitable organization. Remember to get a receipt. If you're audited, no receipt means no deduction.

Certain interest and tax payments can also be accelerated. Some of these are one-time advantages, of course, but they offer advantages in a year that you've had high income. For example, your Jan. 1 mortgage payment really represents interest for the month of December. Make the payment on Dec. 31 of the previous year. By accelerating the payment by one day, you get an additional deduction for the interest paid. The price you pay is that you have to figure the additional interest yourself and add it to the amount reported on your 1098 by your lender. But amortization schedules are easy to generate and the savings are well worth it.

If you're self-employed and pay estimated state income taxes, the same concept works. By paying your state estimated income taxes on Dec. 31, 15 days before they are due, you get to deduct them a whole year earlier.

Search for all credits
A credit is a dollar-for-dollar reduction in your tax. The impact of a credit or two on your tax bill can't be overstated, and the revised tax laws have introduced several new credits that will affect hundreds of thousands of families in the United States.

For instance, every family with an annual income of less than $110,000 qualifies for a $500 credit for each child in the family under the age of 17.

New educational tax credits are also available. The Hope Scholarship provides a tax credit for college tuition for the first two years that a student is in college. It is 100% of the first $1,000 in tuition and 50% of the next $1,000 for a potential total of $1,500 in direct tax reduction.

A second educational credit available is the Lifetime Learning Credit, which kicks in after you (or the student in your household) no longer qualifies for the Hope. It is 20% of up to $5,000 in tuition for graduate or undergraduate expenses.

While not technically a credit, remember to use up your balance in your flexible spending account health plan at work. Sometimes called a cafeteria plan, these programs allow you to set aside pre-tax dollars to pay for health and child care. You lose any money that you don't use as these funds typically don't carry over from one year to the next.

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