Tax rates are as low as they have ever been, and possibly as low as they will ever be again. Take advantage of the 15% bracket. Use it up. It is better to pay tax today at 15% than 10 years from now at 25%. The 15% bracket stops at $28,000 for single, $46,000 for married. This is "taxable income." All your itemized deductions and personal exemptions come out first. Subtract them from gross income, or total income, to calculate your taxable income.

Always be sure to have enough gross income to use up all your deductions and exemptions. For an average family, deductions and exemptions usually total about $22,000.

Self employed people have a great ability to control their taxable income: section 179 expense; timing itemized deductions; managing the invoicing and collection process; and prepaying expenses at year end. All these methods can be used to your advantage to target a certain income range.

New businesses are a prime candidate for targeting income. They have too many expenses the first year. Don't waste them!!!

Part 2 of your tax situation is the large amount of FICA, or Self Employment Tax, that we all pay. For self employed people, FICA is a much larger amount than income taxes. There are no deductions or exemptions to reduce it. It starts at 14% on every dollar of net income of the business.

Losses on Schedule C may sound good this year, but they will cost you next year. A self employed person who loses $10,000 one year and makes $10,000 the next year pays $1,400 more in FICA tax than someone who breaks even for two years. These two people have made the exact same amount and will pay the same amount of income tax, but FICA is calculated one year at a time without getting any benefit from negative amounts.

New businesses need to manage their tax situation to avoid this extra tax.

Most people have the big three deductions: mortgage interest, real estate taxes and state income tax. Added together, they come to about $10,000. You can subtract this off your total income. However, a person with none of these expenses is allowed to subtract off $8,000 from their income. That means that you have paid out $10,000, but only received $2,000 in real savings.

By controlling the timing of the big three deductions, you can take advantage of that discrepancy. Double up your deductions this year and you have $20,000. Next year, have zero. IRS will give you a "free" deduction of $8,000. That means you now have $28,000 in deductions for the two years, not $20,000. But you have not paid out any more money than you otherwise would.

The ideal situation is to have no mortgage interest. Controlling the other two is easy. You can't control mortgage interest. People with mortgages can still benefit, but not as much.

Not everyone is in the right situation or has the correct amounts of income and deductions to make this work. For those that do, it can mean thousands of dollars in tax savings every other year.

I have worked on thousands of tax returns in my 25 years. The people who do well financially are the people who earn interest income rather than paying interest expense. Credit card interest and car loans are both terrible and should be avoided at all costs. They are at a high interest rate and are nondeductible. Student loans aren't so bad. They are usually at very low rates and are deductible. The rules have been changed for 2002 eliminating the 5 year rule on student loan interest.

Mortgage interest is hard to avoid, but can be minimized. Make extra principal payments, even small amounts. The interest expense saved on just one $50 dollar extra principal payment at 7% for 30 years is $105. That is without compounding. Paying early each month can also help. Split payments where you pay half on the 1st of the month and half on the 15th of the month can cut years off a 30 year mortgage. Be sure your lender understands what you are doing and approves it. Some lenders have rules that do not allow these types of payments. Of course, 15 year mortgages are better than 30 year. But the monthly payment goes way up too. Some people can't afford that large of a payment.

If you need a car loan, or have other debts, look into a home mortgage line of credit. You get a tax deduction and usually a lower interest rate.

Rental income is the best income there is. There is no FICA tax. Increasing property values are not taxed until you sell, and then at low rates. Rentals can be set up to make money cash-wise each year, but show a loss on paper. This generates tax savings each year. All that being said, I could never be a landlord. There are frustrations and hassles that I could not handle. Be sure you are up to the challenge.

If you use a management company to avoid the hassles, they will make money, but you will not. Owner occupied rentals, such as a duplex where you live in half, can work well. On-site landlords get better tenants. Problems are minimized because you are there every day. Stay on the high end of the rental scale. You get better tenants and have less problems.

Roth IRA's are tremendous. Pay tax today on a small amount, have no tax later on a large amount. Try to get some money in Roth each year, even if it means cutting back on the 401(k) at work. It will be nice at retirement time to have two separate piles of cash. One is fully taxable. One is not. You will be able to control your tax life better if you have these options.

I envision a time in the not too distant future where they will stop letting you put new money into Roth. The old stuff will still be good, but they won't allow any new money. The government is giving away future tax revenue to get a small amount now. At some point they will realize their mistake.

Converting old IRA money into Roth can also be a good idea. It depends on your individual tax situation. Partial conversions can be done, especially in years when other income is low.

LLCs are corporations, but they have no tax meaning. LLCs are taxed as sole proprietors or partnerships, just as they would have been taxed if you had not formed the LLC. The key to an LLC is the legal protection you get. In order to make this protection stand up in court, you must do everything in your power to keep the LLC "clean." It must be treated as a separate entity and all business finances must be treated as separate and distinct from the individual's finances. Too many people muddy up the books by paying personal expenses from the corporation. Keep it clean!!!

Self employed people can delay taxes due by postponing income until after the end of the year and writing checks for as many business expenses as possible before year end. Cash basis means that whatever happens in the checkbook is the deciding factor. Bill people late in December so that they will not pay you until early January. Stock up on postage and office supplies. By doing this every year, you keep pushing back the deadline for paying your tax.

I think QuickBooks is the best computerized bookkeeping software on the market. I think it works well for most businesses. Businesses need to keep financial records for IRS. Someday you may need these records for the bank, or to show to a prospective buyer of your business. It is hard, if not impossible, to create three years worth of profit and loss statements if you haven't been doing it as you go along.

QuickBooks keeps track of income and expenses. It balances your checkbook. It gives you credible profit and loss statements. It tracks loans, payroll taxes payable, amounts owing on credit cards and assets. It allows you to do analysis of your business operation, such as comparing income and expenses for the first six months of this year to the first six months of last year. Or perhaps to the last six months of last year. This can be a very valuable exercise.

Congress makes the tax laws we live with. They use tax law to encourage certain behavior. The trends recently have been to encourage retirement savings, saving and spending for college and families with children. Retirement and education are both nice ways to reduce your tax bill. Review the different options and you may find a way to save yourself some money.