IRS tax brackets determine your tax rates and how much money you’ll owe Uncle Sam come April. People with large incomes fall into higher federal income tax brackets, so if you earn a lot of money each year, you’ll forfeit a higher percentage of your income to the taxman.
With a few shrewd moves throughout the year, however, you can reduce your taxable income and maybe even drop from a high tax bracket to a lower one. If you want to know how to get into a lower tax bracket, start by making sure you get every tax break that’s available to you.
IRS Tax Brackets
Here are the five filing status categories, according to the IRS:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
Each category contains seven tax brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. The lowest tax bracket is for filers who earn $9,525 or less — you’ll pay a flat rate of 10 percent if your income falls within this range.
After that, you’ll pay a higher rate, but only on the amount that you earn above the previous tax bracket. So, for example:
- Individual taxpayers earning $9,525 to $38,700 are in the 12 percent tax bracket, but they do not owe 12 percent on their entire income. They will owe $952 to cover 10 percent of their first $9,526 in income, plus 12 percent on any amount they earn over that first $9,526.
- Individual taxpayers earning $38,701 to $82,500 are likewise in the 22 percent bracket but owe 22 percent only on income that’s not covered by the preceding two brackets. So, they owe $4,453 to cover both the 10 percent tax for earnings up to $9,526 and the 12 percent tax on their income from $9,526 to $38,700. The 22 percent tax applies exclusively to earnings over $38,700.
- Individual taxpayers earning $82,501 to $157,500 owe $14,089.50 to cover the full bill for each of the three lower brackets. They start to pay the 24 percent rate only on the money they earn in excess of $82,500.
Taxable Income: Less Is More
Because it pays to file taxes in the lowest possible bracket during any tax year, you should reduce your taxable income as much as possible. That said, you should never attempt to conceal income or cheat on your taxes — ever. The risks dramatically outweigh the potential rewards, and the likelihood of getting caught is high. Instead, use every legal tool at your disposal to minimize your taxable income and take every deduction that you qualify for.
Here are 10 options that can help lower your tax bracket:
1. Tie the Knot With Another Taxpayer
You shouldn’t get married just to save a few bucks in April. But, if you’re already considering taking the plunge, know that married couples might save money by filing jointly — especially if one spouse doesn’t work or earns much less than the other. If your combined income qualifies you for a lower bracket, be sure to take advantage.
2. Put Money in a Tax-Deferred 401k
When you contribute to your employer-based retirement plan, not only are you saving for retirement, but you’re also immediately lowering your taxable income. Every dollar you contribute is a dollar less you’ll have to pay taxes on in April.
3. Donate Money to Charity
Generally speaking, donations to charity are tax-deductible. You can write off IRS-qualified charitable contributions and donations to decrease your taxable income, which could lower your tax bracket. You can’t, however, deduct donations you make to individuals, so make sure the recipient of your gift qualifies for a deduction.
4. Look for a Job
Being out of work might provide you with additional write-offs. If you’re looking for work, you might be able to deduct some of your job-hunting expenses — as long as you’re searching in your current field.
5. Go to School
College and university students — or the person who pays for their school expenses — are entitled to several tax deductions. If you’re in school, you can reduce the amount of your taxable income by up to $4,000 if you’re paying at least that amount in tuition costs. You can also write off certain related expenses such as student fees.
6. Use a Flexible Spending Account
Some employers offer employees flexible spending accounts or medical reimbursement accounts. If you have one available to you, take full advantage of it. The money that you set aside isn’t taxed, and you can use it for out-of-pocket medical expenses. Although they’re not required to, employers can make contributions to employees’ FSA.
7. Use a Child Care Reimbursement Account
Some 70 percent of Americans spend at least 10 percent of their income on child care, and one in three are spending at least 20 percent, according to a Care.com survey. Some employers offer child care reimbursement accounts, which are similar to FSAs. The money you set aside in this type of account isn’t taxable, so you pay child care bills with pretax dollars.
8. Sell Losing Stocks
For those with investment accounts, chances are that you have some ugly ducklings you’d love to get rid of. If you’ve sold other stocks for profits that year, you can sell those stocks to realize the losses and reduce your taxable capital gains. Note that stocks you hold for less than a year are taxed differently from those taxed at the long-term capital gains tax rate.
9. Choose a Traditional IRA Over a Roth IRA
If your employer doesn’t offer a 401k plan — or if you work for yourself — saving for retirement is your responsibility. You have several different kinds of individual retirement accounts, or IRAs, from which to choose.
Two of the most common accounts are Roth IRAs and traditional IRAs. Choose the latter if you want to lower your tax bracket — unlike traditional IRAs, contributions to Roth IRAs are not tax-deductible.
10. Consider Taking the Standard Deduction
Taxpayers who don’t take itemized deductions qualify for what’s called the standard deduction. In 2018, the deduction is $12,000 for single taxpayers or married couples filing separately and $24,000 for married couples filing jointly.
You can’t take the standard deduction and itemized deduction at the same time, so do the math or consult a tax professional to see which one makes sense for you. Also, don’t forget to explore potentially lucrative, money-saving credits like the earned income tax credit.
Check out these crazy tax breaks you’ve probably never heard of.
More on Filing Taxes
- Everything You Need to Know About Tax Changes for 2018
- These Are the Receipts to Keep for Doing Your Taxes
- What to Do If You Lost Your W-2
- Watch: Crime Doesn’t Pay — Tax Evasion Penalties Explained
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Joel Anderson contributed to the reporting for this article.