5 Ways to Reduce Taxable Income

Many tax bills are similar to punches to the stomach, and on some occasions, the latter would be more pleasant than the former. Reducing taxes is anyone’s dream, and the perfect scenario would be that in which we wouldn’t have to pay any taxes at all.

Reducing taxable income is one of the most frequently met methods of cutting the taxes altogether. You cannot get rid of the taxes completely – that will never happen, so you mustn’t think that reducing the taxable income will make you exempt from paying taxes like anybody else.

What Is Taxable Income?

Taxable income is that money that’s used in calculating your or your company’s revenue tax. Subsequently, the higher the income, the higher the taxes; by contrast, the lower the income, the lower the taxes. Pure mathematics. Salaries, wages, tips, bonuses, unearned and investment income are all taxable earnings.

How to Lower Taxable Income

So, by reducing taxable income, you’ll also reduce your taxes. Let’s take a look at some of the options you have to do that.

1. Retirement savings

There are three distinct opportunities you get by saving for retirement: planning a self-employed retirement funding, opening an Individual Retirement Account (IRA) or contributing to a 401(k) plan. Each of these comes with its own set of benefits concerning the amount of your taxes.

The IRA, for instance, lowers your taxable income because you’re saving for your retirement. The contributions you will make to the IRA are tax-deductible, which means they will not impact your taxes in any way. However, the withdrawals you’ll be making once you’ve retired will be taxed as income. The IRA is one of the most used ways to reduce taxable income in the US.

The 401(k) plan allows you to invest in your retirement with a chunk of your paycheck before the taxes are deducted. Those savings will be entirely tax-free, but, like in the case of the IRA, the withdrawals will be taxed as income when you retire. But at least you reduce taxable income for years to come.

Of course, both of these methods are entirely legal. It seems like the vast majority of the people think that reducing taxable income is a fraud. It is not, by any means, so you can rest assured that you can lower your taxes without having the IRS penalize you.

2. Health savings

In the same fashion as the savings for retirement, opening an HSA (Health Savings Account) can save you a lot of money you’d pay taxes for. Actually, it is one of the very best ways to reduce taxable income, because the contributions you’ll be making to the account are completely tax-free and the withdrawals are tax-free, as well, if the expenses are qualified. In order to open a Health Savings Account, you must have a HDHP (High Deductible Health Plan).

3. Giving to charity

The following charitable contributions are tax-deductible: cash, donations (clothes or any other items), payroll deductions and checks. It doesn’t seem like it would spare you of too many taxes, but they do, especially when they start adding up.

There are plenty of people with no idea that charity can reduce taxable income. However, this is how many rich people avoid taxes, so you might want to change the point of view when you look at some star that’s a tad too generous. Billions of dollars’ worth of taxes are avoided by doing this.

4. Moving expenses

This modality of reducing taxable income works when your job has been relocated at a distance of at least 50 miles from its old location. The tax adjustment applies to the costs you’ve paid from your own pocket. However, it takes a thorough examination of the accuracy of your claims and also the completion of a Form 3903.

5. Equip your house with alternative energy

Homeowners of “green” homes can get a 30% – 50% tax credit when buying solar panels, solar heaters, heat pumps and wind turbines. That means that your financing will be exempt from taxes.


All of these ways to reduce taxable income are incredibly tempting, but you should not start doing any of them before consulting with a specialist that can guide you and offer you vital pieces of advice on these topics. You’ve probably used some tax breaks in the past, but you should not stop there, especially when you can harvest a lot more by using these more or less known maneuvers.

Once again, none of the above come close to tax evasion. That is a criminal fraud; these are not. It’s simply doing legal things to save on your taxes. The notions above have a lot of implications, so doing research or speaking with a professional are necessary actions when you want to lower your taxable income.