What Is Taxable Income?
Taxable income is the amount of your earnings that the government uses to calculate your income tax. It’s not necessarily the same as your total income (or gross income). After adjustments, deductions, and credits are applied, what remains is your taxable income — and the lower it is, the less tax you typically pay.
The federal tax system (through the IRS) and most states start with your Adjusted Gross Income (AGI) and then apply deductions and credits to reach your taxable income. (IRS)
Lowering taxable income may:
- Reduce your overall tax bill
- Keep you in a lower tax bracket
- Increase eligibility for certain credits
- Lower income-based Medicare premiums or Social Security taxation
- Improve your financial flexibility
Strategies to Lower Taxable Income
Here are several common strategies individuals can use to reduce their taxable income and, consequently, lower their tax bill.
1. Maximize Pre-Tax Deferrals to Employer Retirement Plans
As a W2 employee, company-sponsored retirement plans such as a 401(k), 403(b), SIMPLE IRA, SEP IRA, and other small business retirement plans are offered by many employers. Employees have the option to defer a portion of their income to their retirement plan. These contributions are typically “above-the-line” deductions, meaning they reduce your Adjusted Gross Income (AGI) before other deductions are applied (IRS). In 2026, an employee can contribute up to $24,500 to a 401(k) or 403(b) and up to $17,000 to a SIMPLE IRA. If age 50 and older, an employee can make an additional catch-up contribution of $8,000 to a 401(k) or 403(b) and $4,000 to a SIMPLE IRA. If age 60-63, an employee can make a higher catch-up contribution of $11,250 to a 401(k) or 403(b) and $5,250 to a SIMPLE IRA (IRS). As an additional perk, employers often match employee contributions to their retirement plans up to a certain threshold. As cash flow permits, an employee may consider making contributions to their employer-sponsored retirement plan up to the maximum allowed amount. Another strategy that may be considered is for the employee to contribute enough to be eligible for their maximum employer match (varies by employer).
2. Explore Deductibility of Traditional IRA Contributions (IRS)
Traditional IRAs are retirement savings accounts usually comprised of pre-tax contributions, meaning your contributions are placed in your IRA before being taxed, lowering your taxable income for the current tax year. Based on current tax law, anyone with earned income is eligible to contribute to an IRA for themselves and their spouses, however, the deductibility of the IRA contribution is dependent on tax filing status, modified adjusted gross income, and whether the account holder (and spouse, if married filing jointly) is eligible for a retirement plan through their employer. In 2026, the contribution limit is $7,500, with an additional $1,100 catch-up contribution for those 50 and older. Of note, contribution limits and deductibility rules may differ for prior tax years.
Of note, IRA contributions can be made until the April 15th tax filing deadline (e.g., April 15, 2027, for the 2026 tax year), regardless of whether you file an extension for your tax return.
3. Contribute to a Health Savings Account (HSA) or Flexible Spending Account (FSA) to Pay for Out-of-Pocket Medical Expenses
Depending on medical insurance coverage type, an employee may have the option to contribute to a medical HSA or medical FSA account. If a contribution is made to an HSA from payroll deductions, it is considered a pre-tax deferral, but if you make a direct contribution (i.e. from your bank account) then it is considered a tax deduction, which can be used even if you do not itemize deductions on your tax return (IRS). A contribution to a medical FSA is from payroll deductions and is considered a pre-tax deferral. Withdrawals from a medical HSA or FSA are generally tax-free if used to pay for qualified medical and dental expenses. FSAs can be used in conjunction with a co-pay plan. In 2026, the contribution limit is $3,400. Generally, contributions made to an FSA must be used within the calendar year – in other words “use it or lose it.” Certain plans may offer a grace period or carryover amount, but this is optional so check with your specific plan. If you have a high-deductible health plan you may be eligible to contribute to an HSA. In 2026, the family contribution limit is $8,750 and individual contribution limit is $4,440 (IRS). If age 55 or older, an individual can contribute an additional $1,000 to their HSA. Unlike FSAs, any unused funds in an HSA can be carried over year to year. Additionally, there may be options available to invest funds in your HSA.
4. Use a Dependent Care FSA to Cover Portion of Care Costs
Anyone with young children knows how costly daycare and other forms of childcare can be. Some employers offer Dependent Care FSAs, allowing an employee to make an annual pre-tax contribution to be applied to childcare costs for children younger than age 13. Dependent Care FSAs can also be used for an individual of any age (including a spouse or parents) if they are incapable of self-care, live with you for more than half of the year, and the care is required for you to work or look for work (IRS). In 2026, the maximum limit for those filing taxes as single, married filing jointly, or head of household is $7,500 per household, while the limit for those filing taxes as married filing separately is $3,750 per individual. These contributions are deducted from your salary before taxes are calculated, reducing your taxable income.
5. Save for Future College Expenses with a 529 Savings Plan
With higher education expenses continuing to become increasingly exorbitant, 529 Savings Plans can be used as a savings vehicle. Contributions to these savings plans are not federally tax deductible, but a New York State income tax deduction is available of up to $5,000 as a single filer or $10,000 for married couples filing jointly. Not every state allows contributions to be deductible, so make sure to check your own state’s rules. Although there is technically no annual contribution limit, any contributions over the annual gift tax exclusion ($19,000 in 2026 or $38,000 for a married couple, per beneficiary) could carry gift tax implications. The earnings from 529 plans aren’t subject to federal taxes, and the distributions are generally not subject to tax providing they are used to pay for qualified educational expenses. Per the IRS, beginning in 2026, you can withdraw up to $20,000 of 529 plan funds per year, per student, to cover qualified K-12 educational expenses without incurring federal taxes. However, state tax treatment of K-12 withdrawals may vary, so check with your state’s tax laws. There is no annual limit for college expenses.
6. Take Advantage of Above-the-Line Deductions
Even if you don’t itemize, some deductions may reduce your AGI, ultimately reducing your overall tax liability:
- Student loan interest deduction
- Educator expenses (for teachers)
- Qualified self-employed business expenses
- Alimony (for divorce agreements dated before 2019)
- Retirement contributions and traditional IRA deductions (Eligible if you or your spouse earn income. Deductibility of IRA contributions dependent on tax filing status, MAGI, and availability of employer-sponsored retirement plan.)
Additionally, the One, Big, Beautiful Bill Act introduced the following below-the-line deductions, effective 2025-2028, available regardless of whether an individual elects to use the standard deduction or itemize deductions (IRS).
- Tips Deduction
- Overtime Deduction
- Car Loan Interest Deduction
- Enhanced Senior Deduction (for those 65 and older)
7. Itemize Deductions
Certain individuals may find it to their benefit to itemize deductions instead of taking the standard deduction. These deductions are considered below-the-line and include mortgage interest, state and local taxes, medical costs, and charitable giving (IRS). Be sure to maintain records that prove your eligibility for any deductions you take.
8. Charitable Gifting Strategies
Charitable gifting may be used to manage your taxable income, especially if you itemize deductions. For many taxpayers, charitable giving not only supports causes they care about, but may also create tax savings when structured thoughtfully.
One common strategy is “bunching” contributions, which means consolidating multiple years’ worth of charitable donations into a single tax year. By doing this, you may push your itemized deductions above the standard deduction threshold in that year, allowing you to claim a tax benefit that might otherwise be lost if donations were spread out annually.
Another option for those age 70½ or older is a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from an IRA to a qualified charity, reported as a non-taxable IRA distribution. A QCD strategy can be used to satisfy the annual required minimum distribution from an IRA, up to an annual limit ($111,000 per person in 2026) .
9. Tax-Efficient Investing & Tax Loss Harvesting.
Asset location and tax-loss harvesting are two investment strategies that may reduce your taxable income when applied thoughtfully. Asset location involves placing investments in accounts based on their tax characteristics. For example, holding assets like bonds, which pay out interest regularly, in tax-advantaged accounts while keeping more tax-efficient investments such as index funds, for which most growth would be capital gains, in taxable accounts. Another strategy that may be implemented is tax-loss harvesting. In this approach, investment losses are intentionally realized in taxable accounts to offset capital gains and up to $3,000 of ordinary income. Net losses exceeding $3,000 can be carried forward to future years (IRS). Together, these strategies may reduce the drag taxes can place on investment growth, while keeping the overall investment strategy aligned with long-term goals.
Lowering your taxable income is about combining smart financial choices with a clear understanding of current tax laws. Implementing strategies like maximizing retirement contributions, using pre-tax accounts, thoughtfully itemizing deductions, and taking advantage of state–specific credits, may reduce your tax burden and strengthen your overall financial picture.
Because tax laws are complex and constantly evolving, and because effective tax planning is an ongoing, year-round process, it’s important to consider working with a qualified tax professional or financial advisor. Our team at Howe & Rusling is ready to help evaluate your current financial picture and align tax strategies with your long-term goals.
