Am I making mistakes that are costing me money at tax time?

With some basic knowledge and planning, you can take simple steps to avoid costly tax errors. Avoiding the mistakes cited below will save you money.

The AMT is a separate income tax system with its own set of rules. Basically, you have to figure your tax bill two ways . . . and pay the higher amount. AMT rates start at 26% on the first $175,000 and climb to 28% above that. In the world of the AMT, many valuable deductions are not allowed, including the deduction for state and local income taxes, property taxes, car license fees, certain home-equity loan interest paid, a portion of your medical expenses, and most miscellaneous itemized deductions (such as income tax preparation fees and employee business expenses).

• If a significant portion of your miscellaneous itemized deductions happens to be employee expenses you're not reimbursed for, check with your employer to see if you can be reimbursed directly for your costs.
• Don't assume that it's always best to prepay your state income taxes or your property taxes before the end of the year. If you are subject to the AMT, neither of these expenses is deductible.

Take charitable contributions into consideration. You may not think the clothes you give to charity are worth much, but consider using valuation software and see how much items actually sell for when determining how much to claim. You may be surprised. However, if you donate clothing after August 17, 2006, you can't deduct anything unless the clothes are in good condition or better. Its Deductible software helps you maximize your deductions for donated items. Also, keep track of out-of-pocket expenses you incur while working for a charity A? the cost of stamps you buy for a fundraising mailing, for example, or the cost of ingredients for food prepared for a church soup kitchen for the homeless. Those costs are deductible.

Some taxpayers who work out of their homes steer clear of home-office deductions for fear that such write-offs plant a red flag on their return, begging for an audit. That's silly. If you legitimately deserve such deductions, claim them.

Each time you reinvested dividends, you buy extra shares in the fund. Be sure to add the cost of those shares to your tax basis when you calculate your taxable gain from a sale. Otherwise, you will overpay the IRS. If your fund tracks the average basis of shares for you, it will automatically include reinvested dividends in the calculation; otherwise it's up to you.

If you paid state and local taxes when you filed your 2005 state tax return in 2006, remember to include that amount in your 2006 state and local tax payments. In addition, if you had capital losses in a prior year in excess of the $3,000 deduction limit, be sure to carry the unused losses over to your 2006 income tax return. The same goes for any charitable contribution you couldn't deduct in a previous year because of limits on such write-offs. Don't let such carryovers get lost in the shuffle.

When you die, your IRA ,401(k) or other qualified retirement plan account passes to whoever you have designated as the beneficiary. In many cases, that will be your spouse. But if you designate no beneficiary, the money may go to your estate. If that happens, your heirs are required to clean out the account over a five-year period instead of over their life expectancy, which greatly accelerates the taxes they owe. And naming your grandchildren as beneficiaries may trigger the generation-skipping transfer tax if the amount in the retirement account is very large.

Amounts you contribute to your employer's 401(k) plan not only reduce your taxable income dollar-for-dollar, they also grow tax deferred until you have to withdraw them in your golden years. That's a nice tax shelter. And if your employer matches contributions, such as the first 3 percent of pay you put in, you are missing out on free money if you don't participate. If you choose a Roth 401(k), max out on contributions, too, if you can afford it. Although you don't get an upfront tax break with the Roth version, payouts in retirement can be tax free.

Some taxpayers who have the ability to pay their estimated taxes quarterly either don't find the time to do so or prefer to wait to pay their taxes until they file their income tax returns. This is a mistake: you'll pay an estimated tax underpayment penalty to the tune of about eight percent per year for each quarter that the taxes aren't paid.

Many employees who exercise options and sell the stock in same-day transactions find that the gains they realize from such a sale push them into a higher tax bracket. If this happens to you, and if your employer simply withholds taxes at a fixed rate from the transaction, be sure to determine just what your actual income tax liability will be so that you're not surprised at the amount of tax you owe come April 16.

Switching to a new job is a perfect time to review your overall withholding, particularly if you are getting a significant raise. After you have considered adjusting your federal income tax withholding, don't forget about reviewing your state withholding allowances. That will avoid any unpleasant surprises at filing time.

Individuals whose modified adjusted gross income is over $110,000 ($160,000 for married couples filing a joint tax return) may not contribute to a Roth IRA; doing so will subject you to a six percent penalty on the amount you contributed.

Why is this a mistake? If you're otherwise protected from the underpayment penalties (because, perhaps, you are paying through withholding an amount equal to last year's tax or, for higher income taxpayers, 110% of last year's tax), there's really no reason to pay your federal taxes early. Let that money earn interest for you until it's time to pay taxes.