The best method is, therefore, to plan to reduce the burden of taxes legally. This can be achieved, firstly, by decreasing tax liability on income from salaries and secondly, by raising the quantum of deductions.

‘Income shifting’ is one of the best methods to effect considerable savings in tax. It is a strategy of shifting a person’s income from a higher income bracket to a lower one. Income shifting can be regarded as obscure ‘tax-reduction’ approach. This method is ideal for those who can exercise proper check on their salaries. For example, if an employee is eligible for three months bonus, he can organize with his employer regarding the timing of its receipt. If the individual feels that he is likely to pay more tax next year because of additional income by way of bonus, a rational approach would be to receive bonus in the current year itself.

Let us consider another example, where the individual himself is operating a business enterprise. If he feels that he will be in a lower-tax bracket next year, he could consider undertaking a journey with his family and dispatch a few bills after some time during the year so that his clients would not remit the amount till January next year.

The amounts that are subtracted from gross income before working out the taxable income are ‘deductions’. There are two kinds of deductions: ‘standard deductions’ and ‘itemized deductions’. The total deductions can be computed in any one of the two ways. However, one should deduct the total amount of standard deduction or itemized deduction amount, whichever is higher.

The standard deduction, under the US tax laws, is the amount that a tax payer may deduct from their income and is based upon filing status, age and whether one is blind. Along with personal exemption amount, the standard deduction should be reduced from one’s gross income to arrive at taxable income.

An itemized deduction is an allowable expense that individuals can include in the income tax returns in order to reduce the taxable income. The details of legally permissible items are indicated in Schedule A of ‘IRS’ (Internal Revenue Service).

While the option of standard deduction is most beneficial to those whose financial position is simple and straight forward, the itemized deduction method is meant for those whose finances are beset with lots of complexities. Though itemized type is more complicated, it will save more money than the standard type if it is done properly. It is advisable to adopt Schedule A of ‘IRS’ (Internal Revenue Service) Form 1040 for computing total itemized deductions

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1. Maintain detailed records: This is one of the most important tax tips because, without the big company resources to hire someone to track income and expense records, it is your responsibility to maintain thorough records and keep each receipt to support all of your tax deductions.

2. Deduct your professional space: If you use a separate office space or designate a portion of a spare room in your home or your basement, you are allowed to deduct the percentage of the part of your home you use exclusively for professional purposes. Claim a tax deduction for this percentage from your rent or mortgage payments, utilities, etc. If you keep a cell phone or land line exclusively for business purposes, deduct the amount from any bills.

3. Be sure not to overlook business expenses: Maintain thorough records and keep all receipts for professional travel and other business expenses, which may include supplies for the office, postal and shipping fees, dues for professional memberships, magazine or newspaper subscriptions, and other business items, including software for your computer or technical upgrades.

4. Subtract Daycare costs: The IRS allows deductions for all types of childcare that may be provided during your business hours. These kinds of tax tips are often overlooked but they can save you a lot of money, so be sure to take advantage of the allowed deductions.

5. Create a retirement plan: Consider creating a self-employed retirement plan (that is, a SEP IRA) for tax purposes, as well as for the sake of building money to fund your retirement. You can start with as little as $100, but should you have $2,000 or more, consider a Keogh plan option, which will allow you to keep more money for your retirement in savings that are tax-deferred.

6. Hire your family members: You may subtract medical expenses for the whole family if you hire them legitimately.

7. If needed, defer income: As your own boss, you are allowed to slightly alter your billing so that you can defer income should you find you are in an elevated tax bracket.

8. Get tax refunds from your FICA: Because you are your own employer, you have to pay both the employee and the employer Social Security portions when it comes to your taxes. However, you may deduct 50% of your payments on the 1040 form.

9. If needed, increase expenses: Just like you may choose to defer your income, should you find that you have a high income that pushes you to the next tax bracket, you may conduct more business purchases at the end of the year to augment some of your tax deductions before the 31st of December.

10. Get the correct tax help: Seek tax help from a person who is very well-versed on self- employment issues because your needs differ from a company’s needs.

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