It's never too early to start thinking about your tax situation. Plan, prepare and project now so you won't have any IRS surprises next April.

Tax planning is a year-round process. Here are four ways you can plan today to minimize your contribution to the IRS. Good planning allows you to adjust your finances as needed. If you can defer some of this year's deductions to next year, for example, you might avoid the alternative minimum tax and could then write off those deductions in full.

1. Know what you expect to earn.
Look ahead for the next several months. If your income is going up from a big raise or the recognition of a huge capital gain, then plan for it. You might end up in a higher bracket or be liable for estimated taxes.

2. Know what you expect to pay.
Our tax system is a pay-as-you-go system. If you receive wages, your employer withholds income taxes from those wages. If you have any other kind of income from self-employment, dividends, interest, rents, etc., you may have to pay estimated taxes.

The secret here is to send the IRS only enough to avoid interest or penalties. Anything more constitutes an interest-free loan to the IRS. Never pay more than you have to, and never pay before you have to. Better you should get the interest on the money than the IRS.

For 2008, you don't have to pay estimated taxes, nor are you liable for penalties, if you meet any of the following criteria:

• Your net liability, i.e., the amount you owe after withholdings and any estimated payments, is not more than $1,000.
  
• The total amount of tax you owe is less than 10% of your total 2007 income tax (that's the total tax for which you are liable before any credits for withholdings, estimated taxes paid, etc. -- line 56 on your Form 1040).
  
• You didn’t owe any tax in 2007.
  
• You didn’t have any withholding taxes and your current-year tax less any household employment taxes is less than $1,000.
  
• The total of your withholdings and estimated payments is equal to your 2007 total tax; you also avoid interest and penalties. However, if your adjusted gross income is more than $150,000, the rules change: you must pay 108.6% of your 2006 total tax to avoid a penalty – unless the amount you pay is equal to at least 90% of the tax you owe for 2008. Simple, no? What it means is that if you paid $30,000 in taxes in 2006 and want to be 100% sure of avoiding a penalty, you should make sure that your withholdings and estimated payments add up to at least $32,580 in 2008.

Remember, a huge refund from the IRS is not necessarily a good thing. If you expect to have to pay a big bill in April, put the money in a money-market account to earn you interest.

3. Accelerate or defer your deductions.
Certain expenses, such as medical expenses and miscellaneous deductions, can only be deducted after you exceed a certain percentage of your income.

Only medical expenses in excess of 7.5% of your adjusted gross income and miscellaneous deductions in excess of 2% of your adjusted gross income are allowed. This means that if your adjusted gross income is $100,000, the first $7,500 of your medical expenses and the first $2,000 of your miscellaneous itemized deductions are not deductible.

4. Prepare for the audit.
Anybody can get audited. No matter how careful or conservative you may be, your number just might come up under random selection. But this audit tax terror can be tamed by planning ahead.

We urge all clients to use what we call the "envelope system." Whenever they have an expense that might be deductible, I ask them to get a receipt and put that receipt in a box or special file.

Once a month, or whenever they reconcile their bank statements, we ask them to break down the receipts into individual deductible categories, and have an envelope for each category. For example, you would have an envelope for miscellaneous deductions, charitable contributions, etc. At the end of the year, add the receipts and checks and put that amount on the envelope. These envelopes would then be the basis for your tax return. Of course, if you're using a personal finance software package such as Microsoft Money, you can simply run a report to find your various deductible expenditures. But you still need the receipts, which serve as a solid way to double-check your calculations.

An audit is merely a substantiation process. You have to prove your deductions. But if your charity envelope has $500 in receipts and checks, and if that's the number on your return, when the auditor asks you to prove that $500, all you have to do is hand over the envelope.

In effect, by using this system to accumulate the data used to prepare your return, you have effectively pre-audited yourself.

There are few things as rewarding as leaving an IRS audit with a "no change" letter. Remember, if you get a big refund after an audit, it means that your return was not prepared as well as it could have been. It also casts doubt on your other non-audited returns. Have you given the IRS too much money on those as well?