IRS tax brackets determine your tax rates and how much money you’ll owe Uncle Sam come April. The IRS adjusts the tax brackets for inflation every year.
Those with large incomes fall into higher federal income tax brackets, and if you happen to be in one 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 in your own tax bracket — and maybe even drop down those brackets to a lower one.
Keep reading to find out how to lower your tax bracket and keep more of your hard-earned money. Start by making sure you get every tax break for 2018 that’s available to you.
IRS Tax Brackets 2017
The higher your tax bracket, the more taxes you must pay. Here are the five filing status categories, according to the federal income tax brackets 2017 update:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
Each category contains seven tax brackets: 0 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The lowest tax bracket is for individual filers who earn $9,325 or less — they pay a flat rate of 10 percent in income tax.
Those in the other brackets, however, must pay a base amount plus a percentage of any earnings that exceed the bracket’s minimum. For example:
- Individual taxpayers who earn between $9,326 and $37,950 pay $932 plus 15 percent of everything more than $9,325.
- Individual taxpayers who earn between $37,951 and $91,900 pay $5,226.25 plus 25 percent of everything more than $37,950.
- Individual taxpayers who earn between $91,901 and $191,650 pay $18,713.75 plus 28 percent of everything more than $91,900.
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 cheat on your taxes — ever. The risks dramatically outweigh the potential rewards and the likelihood of getting caught is high.
Never attempt to conceal income. Instead, use every legal tool at your disposal to minimize your taxable income and take every deduction you can. Here are 10 ways you can 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 do better filing jointly because they’ll get a lower tax rate than those in the individual filing bracket.
Also Consider: 29 Biggest Tax Problems for Married Couples
2. Put Money in a Tax-Deferred 401k
When you contribute to your employer-based retirement plan, not only are you saving for retirement, you’re lowering your taxable income immediately. Every dollar you contribute is a dollar less you’ll have to pay tax 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 lower your taxable income, which lowers 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 — as long as you’re searching in your current field — you might be able to deduct some of your job-hunting expenses.
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, according to the IRS. You can also write off certain related expenses like 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 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’ FSAs.
7. Use a Child-Care Reimbursement Account
Half of all Americans spend at least 10 percent of their income on childcare and 20 percent spend a full quarter of their income on it, according to USA Today. 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 childcare bills with pretax dollars.
8. Sell Losing Stocks
If you have an investment account, chances are you have some ugly ducklings you’d love to get rid of but don’t want to sell for a loss. If you’ve owned those losers for more than one year, which is what the IRS considers “long term,” you can reduce your taxable income by selling them.
Stocks you hold for less than a year are taxed differently from those taxed at the long-term capital gains tax rate. Yes, you’ll take the loss, but that loss is usually tax-deductible, which could help you reach a lower bracket.
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 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 2017, the deduction is $6,350 for single taxpayers or married couples filing separately — and $12,700 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 personal exemption and the earned income tax credit.
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