You’ve made it two-thirds of the way through 2008 and now it’s time to start minimizing the tax hit coming your way on April 15, 2009. Luckily, there have been some changes in 2008 that bode well for some of us. Tax laws can be fickle, so we will have to take care not to get into any traps between now and December 31, 2008. The best way to avoid falling prey to the IRS is to plan very carefully for the rest of this year.

Of course, the whole question of whether you will owe money on April 15 starts with taxable income: the higher it is, the more tax you pay, right? If you answered yes, you might be wrong. Actually, there are several types of income that are taxed at different rates: ordinary, capital gain and qualifying dividends.

Ordinary income is the income that can be taxed anywhere from 10% to 35%. This includes wages, interest income, pension, alimony, business and many other forms of income. If you have self-employment income from a partnership or a sole proprietorship, you not only have to pay income tax, but also self-employment tax. Self-employment tax is 15.3% for up to $102,000 in income this year. After that, it drops to 2.9%.

Capital gains are generated by selling or exchanging certain assets held for more than one year. Stocks, bonds, real estate, and other “capital” assets held greater than one year are taxed at 15% if your ordinary tax rate is 25% or more. If your ordinary rate is 10% or 15%, your capital gains tax rate is 0%.

Qualifying dividends are dividends that are taxed at 15%. Just like capital gains, if your normal tax rate is 15% or less, qualifying dividends will not be taxed.

So how do you control what kind and how much income you will realize? The first step is to look at what you have earned so far this year. How has salary income been this year? Did you sell any assets? Are your mutual funds and other investments throwing off qualified or non-qualified dividends? Unfortunately, where you stand today is hard to change, but you can do some things to offset the effects of your year-to-date income.

If all of your income is from a salary, you are not likely to be able to do much about your gross amount. If you have a willing boss, you might be able to convince him or her to hold up your bonus and pay it in 2009, but that will be difficult if the boss needs the deduction.

Interest income is a little easier to legally manipulate. If your savings are in money markets, consider placing a portion in certificates of deposit that pay interest sometime after December 31. Since most people are cash basis taxpayers, this will put some of your taxable income off until 2009. Make sure that you don’t tie up money you will need in the short-term, though.

Whenever you invest, you should look at the prospectus of the company or mutual fund before you buy. This will tell you the kind of income the company produces and, therefore, whether your investment will generate qualified dividend income. Be sure that you don’t buy your stock before the ex-dividend date. Prior to the ex-dividend date, a stock is traded based on its investment worth and the fact that it will soon pay a dividend. If you buy right before that date, you are effectively buying taxable income. Do you own a sole proprietorship or partnership that reports on a cash basis? If you do, you may be in luck. By minimizing taxable income coming from these sources, you may be able to significantly reduce your tax bill. We’ll discuss that in our general business article.

Have you taken large capital gains this year? If you have, you must be a genius! Aside from that, though, you may want to look at your portfolio before year-end. If the goal is to reduce taxable income and you have investments that show a paper loss, why not make the losses real and use them to offset your capital gains? You should only do this if you don’t expect the losing stock to increase in value anytime soon. Remember, you can’t sell a stock and buy it back within 30 days. If you do, the IRS will not allow you to use the loss.

Here’s another idea for capital assets – sell some that show a gain. Suppose you have a capital loss for the year on Widget Company stock of $10,000. Did you know that you can only deduct $3,000 of that loss against ordinary income? Even though the remaining $7,000 can be carried forward, if your Dynamo Company stock has a $7,000 gain, you could sell it, utilize the loss and pay no tax. It’s worth considering if you want to minimize your tax on capital gains.

There are literally hundreds of ways to manage your gross income if you are in the right position, but how about expenses? Just like income, you have to carefully manage your itemized deductions because you most likely will be reporting on a cash basis. If the object is to reduce income, make sure you pay all your deductible expenses by December 31. A short list includes:

• Medical expenses in excess of 7.5% of adjusted gross income
• State and local income taxes
• Real estate taxes
• Personal property taxes
• Interest paid on your home or a second home
• Qualifying contributions
• Employee business expenses
• Investment expenses

If you don’t have the cash to pay these expenses this year, you might consider putting them on your credit card. Uncle Sam will accept this form of payment as being equivalent to paying cash for tax purposes.

Whatever you do to reflect income in the most advantageous manner, don’t forget that there have been some tax law changes this year. Depending on your circumstances, the new tax laws could provide significant benefits - or create an unexpected liability at year-end.

Hopefully, this article has given you a few ideas on how to limit the impact of income taxes on your financial well-being. The truth is, though, that there is no substitute for a thorough planning session with your tax advisor in the next month. He or she has the tools and training necessary to help you take stock of your tax situation and offer guidance on the proper moves for the rest of 2008.

Have a cool September.