More Ways to Pay Less.

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INCOME TAX

Obviously, you want to pay Uncle Sam as little as possible, but you are not quite sure how to (legally) hang on to more of your money. 'There are plenty of ways to take some of the teeth out of your annual tax bite," maintains Taxes 2006 For Dummies, co-authored by David J. Silverman and Margaret Atkins Munro.

"Some of them have to do with minimizing your taxable income; others are often-ignored reductions It's just that most people don't know about these strategies, or else they think such tricks of the trade apply to someone else."

Here are five tax reduction opportunities to consider:

Move extra savings out of the bank. Having a household checking account at the local bank is fine, but you generally are throwing away free interest if you keep your extra savings there. I he better money market mutual funds often pay substantially greater interest than bank savings accounts and offer equivalent safety. Moreover, if you are in a high tax bracket, certain money market funds are tax free.

Invest in wealth-building assets During your working years, while earning employment income, you probably do not need or want taxable income from your investments because it can increase your income tax bill significantly. Real estate, stocks, and small-business investments offer the best long-term growth potential, although you need to be able to withstand dips and sags in these markets.

Fund "tax-reduction" accounts. When funneling savings dollars into retirement accounts, such as a 401(k), 403(b), SEP-IRA, Keogh, or IRA, you can earn substantial up-front tax breaks on contributions.

Work overseas. When you go to work in a foreign country with low income taxes, you may be able to save big time. For tax year 2005, an individual can exclude $80,000 of foreign-earned income (whether working for a company or on a self-employed basis) from U.S. income taxes.

Trade consumer debt for mortgage debt. Suppose that you own real estate and have not borrowed as much money as a mortgage lender currently allows, and further suppose that you have run up high-interest consumer debt. You may be able to trade one debt for another. You probably can refinance your mortgage and pull out extra cash to pay off your credit card, auto loan, or other expensive consumer credit lines. You usually can borrow at a lower interest rate for a mortgage, thus lowering your monthly interest bill. Plus, you may get a tax deduction bonus, because consumer debt--auto loans, credit cards, credit lines--is not tax deductible, but mortgage debt generally is.

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