(MONEY Magazine) – After two major tax increases in three years, many taxpayers hold two articles of faith -- both of them wrong. Article 1: Neither President Clinton nor Congress has the gall to ask us to pay more tax anytime soon. Article 2: There is precious little left that any middle-income American can do to shrink his overall tax bill, which could top the 40% level after adding in state and local taxes. The facts: New taxes are coming, as early as 1994. But with a few well- chosen strategies, you can still cut your taxes by thousands of dollars and, as infomercial star Susan Powter might say, ''Stop the insanity!'' Indeed, by making the moves outlined in this article and in ''Cut Those State and Local Taxes,'' which begins on page 82, you could reduce your total tax bill by 30% or more. And that doesn't even account for the fact that the smartest federal tax-cutting moves -- such as contributing as much as you can to pretax retirement savings plans -- often reduce your state and local income tax as well since most states and localities peg their tax to the income you report on your 1040. Best of all, because today's most effective tax-reduction techniques are long-range tactics, rather than quick fixes at filing time, you'll be able to keep those tax savings rolling in year after year. Just be careful about turning your tax return into IRS audit bait. For details on nine factors that could trigger an audit in U94, see the box on page 78. As you get started trying to ax your taxes, use as your beacons the people profiled and photographed throughout this story, who exemplify the honorable aim of paying the lowest legal tax. They have managed to flatten their federal income tax bills to zero -- or, at least, darned close. Says Elizabeth Gardner, 72, of Phoenix, one of our zero-taxers: ''I'm willing to pay my part. But I don't feel I should pay more taxes than necessary.'' The days of reducing your tax to zero appear to be numbered, however. Our interviews with dozens of tax analysts suggest that with a recalcitrant $255 billion deficit and federal spending already scheduled to rise by 18% in the next five years, taxes will almost certainly have to go up. The nation's highest earners have already taken their lumps, with the new 36% rate for couples with taxable incomes above $140,000 ($115,000 for singles) and 39.6% for incomes over $250,000. The most politically palatable way for Washington to proceed is to avoid a highly visible income tax rate hike on the middle class, while continuing quietly to snip away at write-offs. In 1993, for example, Congress made permanent the provision that clips your deduction for mortgage interest, state and local taxes and miscellaneous expenses by 3% for every dollar earned in adjusted gross income above $111,800. Many experts believe that swipe is a prelude to further cuts. Best prospects: raising the percentage by which your itemized deductions are trimmed to 5% from 3%; shrinking the amount of home mortgage debt against which you can claim an interest deduction from the current $1 million to $500,000; and phasing out the deduction for personal- property taxes. ''Always remember that none of your deductions are sacred,'' says David Berenson, a longtime Washington insider and a managing partner at Berenson & Co. in Washington, D.C. What's more, Social Security payroll taxes are likely to rise. In 1994, inflation alone will boost the wage base on which employees pay the 6.2% Social Security tax to $60,600 from $57,600, for a hike of $186 to total $3,757. Beyond that, Congress could well pass a law to raise the Social Security tax rate and the wage cap -- options it may find irresistible as spending outstrips revenue and retiring baby boomers strain the Social Security trust fund. Says Bruce Schobel, an actuary at New York Life and a former high-ranking official at Social Security: ''Congress could raise the tax for general budgetary reasons at any time.'' Clearly, then, it's more important than ever to take advantage of the tax- cutting strategies that are still available. Get started with the seven noted below, which fall into four categories: your family, your investments, your retirement and your job. -- Transfer money into your child's name through a custodial account. For starters, his or her standard deduction shields the first $600 of investment income in 1994. Earnings above that, up to $22,750 this year, are taxed at just 15% -- as long as your child is at least age 14 -- a bracket that's almost certainly far lower than yours. ''The incentive to shift income to low- bracket children just gets greater with every new tax-rate increase,'' says Patricia Acuff, a tax partner at the accounting firm Moss Adams in Seattle. The best way to funnel your family's income to your kids is to put taxable, income-producing assets such as cash or dividend-paying securities into a no- fee custodial account that you open in your child's name at a bank, brokerage or mutual fund. You can give as much as $10,000 a year without incurring a gift tax ($20,000 if you and your spouse make the gift together). The funds in the account belong to your child but are managed by a custodian -- you or someone you appoint -- until the child reaches age 18 or 21, depending on your state's law. Say your 15-year-old son's custodial account earns $5,000 and he has no other income. The federal income tax on the account would come to $660. He might owe a negligible amount of state taxes on the funds too. Your tax on the same amount, assuming a 35% combined federal and state tax rate, would be more than 2h times that amount, or $1,750. If your child is under age 14, don't put more than approximately $50,000 into the custodial account this year, though. That's because the so-called kiddie tax requires him or her to pay tax at your top rate on investment earnings above $1,200, which is the amount $50,000 would earn in a bank money- market account assuming a 2.4% interest rate. -- Go for growth investments. The '93 tax law kept the top capital-gains rate at 28% for investments held more than a year. So if your top rate is 31%, 36% or 39.6%, you might want to take advantage of the spread by investing in growth stocks or growth mutual funds whose profits come mainly from capital appreciation. Two caveats: 1) Never base any investment decision primarily on taxes. ''Your investments have to make sense in terms of the economy, your goals and your risk tolerance,'' says Anne Lieberman, a financial planner in San Rafael, Calif. And 2) don't venture into growth investments unless you plan to hold them for at least five years. You need to stay in the market long enough to ride out any downturns. Lieberman favors these two growth funds: Lindner Fund (up 12.04% on average for the five years to Dec. 1; 314-727-5305) and Janus Fund (up 19.93% a year on average for the same period; 800-525-3713) because they take less risk than other funds in their category yet are long- term top performers. -- If you're in the 28% tax bracket ($38,001 to $91,850 for married joint filers; $22,751 to $55,100 for single filers) or higher, consider high-quality municipal bonds. In today's bond markets, such taxpayers can get better after- tax returns on munis and muni bond funds than on comparable taxable bonds or bond funds. High-quality munis rated A or better with maturities of under 15 years are your best buys today, given the likelihood of a 0.5% interest- rate rise in '94. If rates moved up that much, long-term munis generally would drop in value almost twice as much as intermediate-term munis. Such bonds recently yielded around 4.25% to 4.9% free of federal and usually state and local income taxes if you live in the state where the bonds are issued. That's equivalent to 6.65% to 7.67% for a New York City investor in the 28% federal bracket. Comparable taxable corporate bonds recently yielded about 5.5% to 6.1%. Since it takes $25,000 to $50,000 to achieve sufficient diversification in individual muni bonds, you might instead decide to invest in an intermediate- term muni bond fund, which will provide solid income along with protection against rising interest rates. Ralph Norton, editor of the monthly newsletter Bond Fund Advisor, likes Vanguard Municipal Intermediate (recent yield: 4.59%; 800-662-7447) and Dreyfus Intermediate Municipal Bond (recent yield: 4.56%; 800-645-6561). -- Consider rental real estate. Now is an opportune time to take advantage of the tax breaks of owning rental real estate, as do Mark and Sally Richardson, profiled on page 72. With the housing market now on the upswing, says Gopal Ahluwalia, director of research at the National Association of Home Builders, single-family rental houses and small apartment buildings can provide annual returns of 15% or more if held for five or more years through a combination of appreciation, tax benefits and rising rents. The tax angle: If your adjusted gross income is $100,000 or less and you actively manage your property, you can deduct as much as $25,000 of rental losses against your other income. Since a large portion of any rental loss is likely to come from depreciation, the deduction may actually exceed your operating costs. The $25,000 maximum allowable loss ratchets down by 50 cents for every dollar of AGI above $100,000 and disappears at $150,000. At an AGI of $125,000, for example, you could write off $12,500 in losses against ordinary income. -- Stretch to bolster your contribution to tax-deferred retirement savings plans. If you feel you can't afford to stoke your company-sponsored 401(k) with the maximum amount your plan allows, Lynn Ballou, a financial planner in Lafayette, Calif., suggests that you re-examine how you spend and save. Your aim: to determine whether you can use the earnings on any other savings and investments for daily expenses, thus freeing up more of your salary for 401(k) contributions. Say you're single and make $40,000 a year and now put 4%, or $1,600, in your 401(k). Also assume you earn -- and reinvest -- about $100 a month from investments. If you used that money for your everyday cash outlays, you could painlessly bolster your 401(k) contribution to 6% a year, the maximum allowed under many plans. That's an $800 increase, to $2,400. The payoff: You would reap another $224 in federal income tax savings, assuming you are in the 28% bracket and, most probably, $400 more in employer matching funds, since companies generally match employees' 401(k) contributions by 50%. With a modest 7% return, youUd bolster your stash by $7,201 after five years, $52,397 after 20 years. If you're self-employed, you can make tax-deductible contributions of as much as 20% of your net self-employment earnings, up to $30,000. Start out by fully funding a profit-sharing Keogh, which you can generally open free of charge at a bank, brokerage or mutual fund. YouUre allowed to make a deductible contribution of as much as 13.04% of self-employment income up to $150,000 but can alter the size of your contribution each year. Then as your earnings stabilize, also begin funding a money-purchase Keogh with 6.96% of your income. This plan requires you to set aside the same percentage every year. -- Retirees: Reduce the tax hit on your Social Security. The new tax law will deal its sharpest blow to many retirees through a change that takes effect in '94. Once your ''provisional income'' -- which is your adjusted gross income, plus your tax-exempt income, plus one-half of your Social Security benefit -- exceeds $44,000 (for couples) and $34,000 (for singles), as much as 85% of your Social Security is taxed, compared with a maximum of 50% under the old law. Here are two ways you can duck: You can defer income into 1995 or later by moving out of some investments that generate cash you don't need currently and into ones that let you delay reporting the income. With U.S. Series EE savings bonds, for instance, you can invest as much as $15,000 a year ($30,000 for couples) and earn a guaranteed minimum annual rate of 4% if you hold the bonds for at least six months; the current rate is 4.25%. You do not have to include the interest in your income until you redeem the bonds -- as long as 30 years after you buy them. You may also be able to trim the tax you owe on your benefits by investing in tax-free munis, even though tax-exempt interest is counted when calculating whether you owe tax on Social Security. Here's how: Say you and your spouse are in the 28% bracket and take the standard deduction for persons over 65. Also assume you collect $20,000 in Social Security benefits and have provisional income of $56,000, of which $6,000 is interest from taxable bonds and $40,000 is from taxable pensions. If you replace the taxable bonds with munis or a muni fund, you'd need to earn interest of only $4,320 to pocket as much as you would on the taxable bonds after tax. (You could do that with a $100,000 portfolio of munis yielding 4.32%.) And only $4,320, rather than $6,000, would be added to your provisional income to determine how much of your Social Security benefit is taxable. Result: You would shield from tax an additional $1,428 of your Social Security benefit, for a tax savings of $400 a year. ''This strategy works best if your provisional income is not too far above the new 85% thresholds,'' says Richard Wagener, a financial planner in Columbia, Md. So even though it won't work for every retiree, the potential savings make it worth running the numbers. -- Give, don't entertain. Starting this year, you can deduct only 50% of the cost of unreimbursed business meals and entertainment, down from 80%. To woo your clients or business associates, Mary Sprouse, a Los Angeles tax attorney and author of The MONEY 1994 Income Tax Handbook (Warner Books, $13.99), suggests giving gifts instead. Their cost is deductible -- as much as $25 a recipient. If you give tickets to a sporting event and don't go along, you can treat the expense as a gift or entertainment, whichever is more advantageous for your taxes. If you attend, however, the cost must be treated as an entertainment expense. But why not go along and enjoy yourself? After all, if you follow the advice in this story, you'll be able to pay for the splurge from your tax savings.