AS PAINFUL as it may be, now is a good time for taxpayers to review investment statements and paycheck stubs to see where they stand and what steps they can take to trim their 2002 tax bills.

There are some new tax breaks this year as well as some strategies to make the best of investment losses and to beef up retirement savings, experts said.

Tax specialists also warn middle-income families to be careful to avoid the alternative minimum tax, or AMT. Created decades ago after 155 wealthy people escaped paying taxes, the AMT is expected to affect 2.6 million returns this year because it has never been adjusted for inflation, reports the Tax Policy Center.

"What's unfortunate is when people are in AMT and they are not aware of that until the year has passed. They can't adequately plan," said Dee Ann Remo, a partner with KPMG LLP in Richmond, Va. "Unfortunately, they do things that make the situation worse."

Here are some suggestions to make your tax situation better:

Retirement accounts. Take full advantage of retirement savings accounts that reduce your taxable income and allow your money to grow tax-deferred.

Annual limits on retirement account contributions rose this year. Workers can now put up to $11,000 in a 401(k) and up to $3,000 in an individual retirement account.

Those nearer retirement can salt away even more. Workers 50 and older can contribute up to $12,000 in a 401(k), if their plan permits, and up to $3,500 in an IRA.

If you're not covered by a retirement savings plan at work, you can fully deduct contributions to a traditional IRA. But if covered by an employer's plan, income limits apply. Deductions for IRA contributions begin phasing out for singles with adjusted gross income between $34,000 and $44,000 and joint filers with income between $54,000 and $64,000.

IRA contributions for 2002 can be made until April 15.

Capital gains and losses. "We never recommend someone buy and sell stocks for the tax consequences," said Mary-Kay Leary, an accountant with Naden/Lean LLC in Timonium. But when it makes investment sense to sell, there are ways to reap a tax benefit, she said.

Investors can use losses to offset capital gains. If losses are greater, filers can deduct up to $3,000 in losses from ordinary taxable income.

Keep an eye on upcoming tax legislation because that $3,000 limit might be raised by the new Republican-controlled Congress, said Jim Seidel, senior tax analyst with RIA, a provider of tax information in New York. The limit might go up to $6,000 or as much as $10,000, and could apply to 2002 returns, he said.

IRA conversions. Falling stock prices make this a good time to convert a traditional IRA to a Roth IRA by year's end, Leary said.

In a traditional IRA, investors may be eligible to deduct all or part of their contributions and later pay ordinary income tax on withdrawals. Money goes into a Roth after taxes have been paid, but investors get tax-free withdrawals in retirement.

To make the switch to a Roth, investors will have to pay any income tax due on the traditional IRA based on the amount converted. But with so many accounts hammered by the weak stock market, the tax bite will likely be a lot less if a conversion is done now than when stocks had been soaring, Leary said.

But those who converted from a traditional IRA to a Roth early this year might want to switch back if their account balances continued to fall, experts said.

For instance, if their tax bill was based on $100,000 transferred into a Roth and the amount has fallen to $60,000, they can change back to a traditional IRA so they won't owe tax on the bigger balance. Taxpayers have until April 15 to make this change, or until mid-October if they get an extension.

Charitable contributions. Donate appreciated investments directly to charity, Leary suggested. This way, you get to deduct the fair market value of the investments on your itemized return, and you won't owe capital gains tax on the sale, she said.

Chances are this year your investments have dropped in value. In this case, sell the investments first, then donate the proceeds. That way, you can use the losses to offset capital gains and get a deduction on the donation, experts said.

Consider making donations by credit card, Leary said. You get the deduction the year the donation is charged to the card, even if you don't pay the debt until next year, she said.

Breaks for teachers and students. Beginning this year, teachers who spend their money for classroom supplies, without being reimbursed, can deduct up to $250 of expenses on their returns without itemizing. If they spend more, they can include the excess amount in miscellaneous deductions.

"It's my impression that teachers were incurring these expenses without tax breaks. It's a little something for what they were doing anyway," said Mark Luscombe, a principal with CCH Inc., an Illinois tax information company.

Also new this year is a deduction for up to $3,000 in higher-education expenses, Luscombe said. It's available to single taxpayers with adjusted gross income of up to $65,000 and joint filers with income up to $130,000. The tax deduction can't be used the same year the student is using the Hope Scholarship or Lifetime Learning credit, he said.

Taxpayers can still deduct up to $2,500 in student loan interest paid annually, but this year more people will be able to take advantage of the break because the income limit for eligibility has been raised, Seidel said.

The tax break begins phasing out for singles with adjusted gross income of $50,000 to $65,000 and for joint filers with income of $100,000 to $130,000.

Education accounts. Residents contributing to their home state's college savings and prepaid tuition plans may be able to deduct all or part of their contributions on their state tax returns. Maryland allows an individual to deduct up to $2,500 of contributions per beneficiary each year.

Alternative minimum tax. The 2001 tax law offered a little relief from the AMT, but accountants say they a dealing with the tax more than ever.

Filers pay regular income tax or the AMT, whichever generates the most money for Uncle Sam. The regular income tax formula permits deductions that the AMT doesn't, so by taking lots of deductions a filer can end up owing the AMT, which carries rates of 26 percent and 28 percent.

Experts suggest filers ask a tax preparer or use tax software to see if they risk incurring the AMT; they might be able to avoid moves that trigger it.

To suggest a column idea, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.