There are numerous tax breaks, tax credits, deductions, and other tax benefits that are reduced or eliminated if a taxpayer's adjusted gross income (AGI), exceeds specified thresholds. As year-end nears, taxpayers who do not anticipate being subject to higher rates next year should consider reducing their 2010 AGI by deferring taxable income into 2011, or by accelerating deductions, if doing so will keep their income level for the current tax year below the relevant phase-out thresholds:


1. Convert taxable interest to tax-exempt interest. This is practical where an individual will recognize little or no gain on the disposition of the taxable investment, such as when shifting funds in a taxable money market account to a tax-exempt fund. The tax-exempt interest will not be included in AGI.


2. Convert taxable interest to tax-deferred interest or income. Instead of leaving funds in a savings or money market account generating taxable interest, some individuals may want to shift some funds to U.S. Series EE bonds or inflation-indexed U.S. Series I savings bonds. The interest on Series EE or I bonds is not taxed until the bonds mature or are redeemed.


3. Increase contributions to retirement plans. Some individuals may be able to reduce AGI by increasing contributions to retirement plans such as 401(k) plans, SIMPLE pension plans, and Keogh plans.


4. Increase contributions to Health Savings Account (HSA). Individuals who are covered by a qualifying high deductible health plan (and are generally not covered by any other health plan that is not a qualifying high deductible health plan) may make deductible contributions to an HSA, subject to certain limits. For calendar year 2010, assuming a full year of coverage, the maximum contribution for self-only coverage is $3,050, and for family coverage it's $6,150.


5. Defer receipt of year-end bonuses. An employee who believes a bonus may be coming his way may request that his or her employer delay payment of any bonus until early in the following year.


6. Pay up to $2,500 of student loan interest. Up to $2,500 of student loan interest paid during a tax year is deductible in computing AGI. A taxpayer should consider deducting up to this amount in a tax year even if less than that amount is required to be paid in that tax year.


7. Pay back alimony in 2010. An individual required to pay alimony to a former spouse is entitled to deduct that alimony in the year paid.


8. Pay off debts. If an individual has both income generating investments and debts on which he is paying interest, he should consider selling part of his investments and using the proceeds to pay off debt.


Please note that not all steps listed above will be available or desirable for every individual. Our firm has helped numerous taxpayers resolve their federal tax liabilities.