As John has said, the material is removed at the rim, behind the ring gear. I machine to within about .050 of the gear, and then reduce the diameter until the cut nearly breaks into the clutch cover bolt holes. I also leave a large radius in the transition between the two surfaces. I have measured stock wheels up to about 22 pounds. Some seem thicker than others. Normally this amount of machining removes about 4 pounds.
The lathe needs to be large and rigid, with the ability to get down to about 50-60 RPM. A HSS toolbit is all that is needed, and as with all cast iron, heavy feed and slow speed are the way to go, and dry. It is best to dial it up in a four jaw independant chuck - to within a thou or two laterally and axially.