Many taxpayers don’t realize they can reduce their tax burden for the previous year in the first few months of the year. Two of the ways to do that is to make contributions to traditional Individual Retirement Account (IRA) and, if qualified, take advantage of the Saver’s Tax Credit. Both options are permitted by the Internal Revenue Service up until the tax filing deadline, April 15.

Contributions to a traditional IRA are tax deductible, which lowers your taxable income. For the 2008 tax year the IRS allows contributions up to $5,000 or $6,000 if your over age 50.   Let’s say you contributed $1,000 to your IRA, it would lower your taxable income by $250 if you were in the 25 percent tax bracket.

When making a contribution in the first few months be sure to indicate the tax year on your IRA contributions. If you don’t, the contribution will be posted to the wrong year. To prevent this error, indicate the tax year directly on the face of the check or indicate the year in your fund transaction instructions when moving them from a non-IRA account.

Another overlooked federal tax credit is the Saver’s Tax Credit. Established in 2002, it was formulated to help low-to-moderate income employees contribute to IRAs.  The Saver’s Tax Credit allows a credit of up to $1,000 ($2,000 for filing jointly) to reduce federal income tax.

Unlike a tax deduction, the Saver’s Tax Credit will directly lower your tax bill. So a $1,000 tax credit lowers your tax bill by a full $1,000.  To file the Saver’s Tax Credit use IRS Form 8800.

Here are some other things to know about making IRA contributions:

• Traditional IRAs are not taxed until you receive distributions from that IRA.
• You cannot deduct an IRA contribution or take advantage of the Saver’s Tax Credit on Form 1040EZ; you must use either Form 1040A or Form 1040.
• To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year.
• You must have taxable compensation, such as wages, salaries, commissions and tips. If you file a joint return, only one of you needs to have compensation.

It’s important to understand and take advantage of the options available to reduce your tax liability - especially those that are often overlooked.

The Internal Revenue Service is getting reports that some tax preparers are telling customers that their stimulus checks are taxable.

But the IRS has clarified that the stimulus payments will not reduce your 2007 or 2008 refund, nor will they increase the amount you owe when you file your 2008 return.

The confusion apparently has surfaced with various income tax software packages.  It asks filers to report the amount of their check to determine if they are eligible for the new recovery rebate credit.  So if you use tax software, be certain to check that the program is not calculating tax on stimulus payments.

Taxpayers who did not receive a stimulus payment may be eligible for a recovery rebate credit.

Let’s face it, times are tough and they will probably get tougher before they get better.  It’s certainly not the time to make charitable contributions … or is it?

Making charitable contributions could help to reduce your 2008 income tax obligations.  Here are a few recommendations and the rules for each, from non other than the IRS:

1. Special Charitable Contributions for Certain IRA Owners
An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

2. Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

3. Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end giving, the IRS offers additional reminders at http://www.irs.gov/newsroom.