Tax bills that are lowered are usually enjoyable. For most taxpayers, reducing your tax liability is a rather simple process that doesn’t involve breaking the law and maybe incurring some really harsh consequences in the future. Decrease your taxable income to accomplish this goal in the easiest way possible.

This does not entail requesting a pay reduction from your employer; rather, the goal is to have a portion of your income declared tax-free. When you can use this method to move into a lower tax bracket, you will not only save money on taxes but also cut your tax rate on a portion of your income. That’s when it really shines.

You’ve probably seen those tax charts with the income ranges on one side and a series of percentages – 10%, 15%, 25%, etc. – on the other side. Many people jump to the conclusion that having an income in a particular range means all of their income is taxed at that bracket’s rate. Actually, tax brackets are “marginal,” rather than absolute. That means only part of your income within each range is taxed at the corresponding tax rate.

Take a look at this 2017 tax bracket report to get an idea of what that means. If your filing status is single, and you made $50,000 in 2017, then the first $9,325 of your income would be taxed at a 10% rate (in other words, you’d owe $932.50 in taxes on that chunk of income). Your income between $9,325 and $37,950 would be taxed at a 15% rate, and the rest of your income for the year would be taxed at a 25% rate.

In this example, the income that the IRS hits the hardest is a bit above $37,950. But if you could turn all your income above $37,950 into nontaxable income, then the IRS would keep its hands off everything in the 25% tax bracket, and your top tax rate for the year would be 15% – a much nicer number. So if you wanted to drop into a lower tax bracket, your goal for 2017 would be to get at least $12,050 (that’s $50,000 minus $37,950) of your income declared off-limits for tax purposes.

How to Make Your Income Nontaxable

In fact, there are a number of alternatives the IRS offers to convert taxable income into nontaxable income. We refer to them as “deductions.” Yes, in reality, a deduction is just a method of designating a portion of income as nontaxable. It’s the method the federal government gives you incentives to spend your money in ways that it thinks would improve society. Planning your deductions ahead of time can ensure that you meet your target, which in this case is $12,050, and help you maximize your deductions.

Consider the following options:

• Contributing to a retirement account. If your employer offers you a 401(k) account, then use it – the contributions will typically come out of pre-tax income, so they automatically lower your taxable income without any extra work required on your part. Is no 401(k) available? No problem. Practically any bank or brokerage firm will happily set up an individual retirement account (IRA) for you, often with low or no fees. Any contributions you make to an IRA are fully deductible (as long as your income falls below a certain threshold ). Note that if you’re trying to reduce your taxable income now, you’ll want a traditional IRA, not a Roth IRA, which is funded with after-tax money. For 2017, you can contribute up to $18,000 into a 401(k) or up to $5,500 into an IRA. If you’re aged 50 or older, the maximums go up to $24,000 and $6,500, respectively.
• Contributing to an HSA. If you have a high-deductible health insurance plan, then you may qualify to open an HSA, and any contributions you make to said HSA are deductible. For that matter, distributions from the HSA (when used to pay for medical expenses) are also tax-free. HSAs are definitely a taxpayer’s friend. For 2017, the annual contribution limit for HSAs is $3,400 if you’re on an individual health insurance plan or $6,750 if you’re on a family plan.
• Pay (the right kind of) interest. The interest you pay on certain kinds of debt is deductible. This includes mortgage interest, student loan interest, interest on debt used to purchase investments, and interest on business debt. There is one catch, though: You can only claim interest deductions if you itemize, rather than taking the standard deduction (excepting student loan interest — you don’t have to itemize to take that one). Retirement account and HSA contributions, on the other hand, can be deducted regardless of how you itemize. If you have a lot of itemized deductions to claim, it’s probably worth your while to do so.
• Pay your taxes. The state and local taxes that you pay, including real estate taxes, qualify as an itemized deduction. This can help push you into the “itemizing makes sense” category if you’re close but not quite there. Note that you can deduct either state income tax or state sales tax, but not both; usually, it makes more sense to deduct the state income tax, but if your state has low or no income tax, then deducting your sales tax is the way to go.
• Donate to charity. Charitable contributions of up to 50% of your adjusted gross income are also deductible if you itemize. The contributions must go to a qualified charity, and both cash and property donations can be deducted (property is generally deducted at the fair market value). This is a great way to do well by doing good. If you’re approaching the end of the year and you don’t have quite enough itemized deductions to make itemizing worthwhile, then consider clearing out the attic and making a big donation.

If the year’s already over and you didn’t quite manage to drop into a lower tax bracket, then you have one last chance: IRA contributions made up until the deadline for the previous year’s tax return can count as deductions for the previous year (usually April 15, unless that date falls on a weekend). This will only work if you’re eligible to deduct IRA contributions and you haven’t already maxed them out for the year, but if you meet those requirements it’s a perfect last-minute save for your tax bill.

How to Lower Your Tax Bill

Anybody’s day can be ruined by an unexpected tax bill. Here are a few simple steps that many people can do to lower their tax costs in 2024 to help prevent that nasty surprise. Using these tactics may require you to itemize rather than take the standard deduction in some circumstances, but the extra work can be worthwhile.

1. Tweak your W-4

The W-4 is a form you fill out to tell your employer how much tax to withhold from each paycheck.

• If you’ve gotten a huge tax bill in the past and don’t want another surprise next year, raise your tax withholding amount so you owe less when it’s time to file your tax return.
• If you’ve previously gotten a big refund, do the opposite and reduce your withholding — otherwise, you could be needlessly living on less of your paycheck all year. You can change your W-4 any time.

2. Learn more about your 401(k)

Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k).

• In 2024, you can funnel up to $23,000 per year into an account.
• If you’re 50 or older, you can contribute an extra $7,500 in 2024

These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you’ll get free money to boot.

3. Look into an IRA

There are two major types of individual retirement accounts: Roth IRAs and traditional IRAs.

Read Also: How do High Income Earners Reduce Taxes UK?

You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.

• For example, in 2023 (taxes filed in 2024), you may not be able to deduct your contributions if you’re covered by a retirement plan at work, you’re married and filing jointly, and your modified adjusted gross income was $136,000 or more. For 2024 (taxes filed in 2025), the AGI limit rises to $143,000

There are limits to how much you can put in an IRA, too:

• For 2023, the limit is $6,500 per year ($7,500 for people 50 or older). For 2024, the limit is $7,000 per year ($8,000 for people 50 or older). You have until the tax filing deadline to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy.

Note that the contribution limit is a combined limit. So, for example, you would hit the 2024 contribution limit if you put $3,000 into a traditional IRA and $4,000 into a Roth.

4. Save for college

Setting aside money for a child’s tuition can shave a few bucks off of your tax bill, too. A popular option is to make contributions to a 529 plan, a savings account operated by a state or educational institution. You can’t deduct your contributions on your federal income taxes, but you might be able to on your state return if you’re putting money in your state’s 529 plan. Be aware, too, that there may be gift tax consequences if your contributions, plus any other gifts to a particular beneficiary exceed $17,000 in 2023. For 2024, the limit is $18,000.

5. Fund your FSA

The IRS lets you funnel tax-free dollars directly from your paycheck into a flexible spending account every year, so if your employer offers an FSA, you might want to take advantage of it to lower your tax bill.

• In 2024, the limit is $3,200

You’ll have to use the money during the calendar year for medical and dental expenses, but you might also be able to use it for related everyday items such as bandages, prescriptions, and glasses or contacts for yourself and your qualified dependents. Some employers might let you carry money over to the next year.

6. Subsidize your dependent care FSA

This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it.

• For 2024, the IRS will allow for the exclusion of up to $5,000 of your pay that you have your employer divert to a dependent care FSA account, which means you’ll avoid paying taxes on that money

That can be a huge win for parents of young kids, because before- and after-school care, daycare, preschool and day camps usually are allowed uses. Elder care may be included, too.

What’s covered can vary among employers, so check out your plan’s documents.

7. Rock your HSA

If you have a high-deductible health care plan, you may be able to lighten your tax load by contributing to a health savings account, which is a tax-exempt account you can use to pay medical expenses.

• Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses.
• For 2024, if you have self-only high-deductible health coverage, you can contribute up to $4,150.
• If you have a family with high-deductible coverage, the contribution limit is $8,300 in 2024. If you’re 55 or older, you can put an extra $1,000 in your HSA.
• Your employer may offer an HSA, but you can also start your own account at a bank or other financial institution.

8. See if you’re eligible for the earned income tax credit (EITC)

The rules can get complex, but if you earned less than $63,398 in 2023, the earned income tax credit might be worth looking into. Depending on your income, marital status and how many children you have, you might qualify for a tax credit of up to $7,430 for taxes filed in 2024.

For 2024 (taxes filed in 2025) the income limit is $66,819 and the maximum credit amount is $7,830.

A tax credit is a dollar-for-dollar reduction in your actual tax bill — as opposed to a tax deduction, which simply reduces how much of your income gets taxed. It’s truly found money, because if a credit reduces your tax bill below zero, the IRS might refund some or all of the money to you, depending on the credit.

9. Give it away

Charitable contributions are deductible, and they don’t even have to be in cash. If you’ve donated clothes, food, old sporting gear or household items, for example, those things can lower your tax bill if they went to a bona fide charity and you got a receipt.

For the 2023 tax year, you may be able to deduct 20% to 60% of your adjusted gross income for charitable donations, but this is if you itemize, versus taking the standard deduction.

Many tax software programs include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill — it can add up to big deductions.