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It may seem a little early to start thinking about taxes, but it really isn’t. We’ve started the fourth quarter of 2009, which means that 2010 is right around the corner. So, before the end of the year (and in advance of next year), it is a good time to reconsider you tax situation. And how you can find the right balance that can help you avoid paying too much in taxes.

Missing out on deductions and credits

With so many possibilities, it is little surprise that many people pay too much in taxes by missing out on deductions and credits that they are eligible for. Tax preparation software, or a tax professional, can help you reduce how many of these helpful tax breaks you miss. Planning ahead for next year, to make sure that your budget reflects what is in your best interest for taxes can also help.

Another thing to watch out for is the way you sell your investments and other assets, as well as how you set up a business. There are certain advantages to different legal structures for businesses, and different rules for selling your assets. Whether you are taking a loss on your investment portfolio or home, or whether you owe for a gain, taxes are applied differently. Check your investments for tax efficiency. When possible, use tax-advantaged retirement accounts for as many of your investments as possible. Once you move beyond that, make sure that you understand the rules of short-term and long-term capital gains (long-term capital gains are taxed at a lower rate), so that you save the maximum amount in taxes.

Stop providing the government a free loan

It may be tempting to withhold extra money from your paycheck in order to get a tax return. However, this is another instance of overpaying your taxes. Even though you get the money back eventually, the fact is that, for a brief time, you paid more than you needed to. You gave the government an interest-free loan, instead of putting that money to work for you.

When filling out your employment paperwork, just enter in the number of exemptions and leave it at that. You employer will take out what is required. There is no need for you to keep out extra — especially when you could be putting that money aside in a high-yield account of some sort. That way your money works for you, rather than sitting uselessly in government coffers.

Be careful if you are self-employed, however. Make sure you use the prescribed rules to figure out your tax requirement. If you paid taxes last year, you can use that to estimate your taxes for this year. Take 100% of that amount, and divide by four. You should pay your estimated taxes on a quarterly basis. As long as you aren’t short by too much, you shouldn’t have any problems. Be warned: Setting all of what you should be paying in quarterly taxes aside to earn interest all year will back fire. The IRS will charge you interest and possibly other penalties if your tax liability exceeds a certain amount. So pay your quarterly estimated taxes on time.

To make sure that you are in compliance, you might check with a tax professional, or visit the IRS web site.