Money Moves We Make to Get into a Lower Tax Bracket

Laura Quinn for Yahoo News writes:  I haven't been in the 10 percent tax bracket since I made money at my part-time job at the mall in high school. My husband and I usually fall in the 25 percent tax bracket unless we make smart financial moves throughout the year to lower our taxable income. While it's not always possible, I contribute as much as I can to retirement accounts so we can be in the 15 percent tax bracket. I'm not an expert on taxes, but I have followed the advice of personal finance experts throughout the years to reduce my tax bill. According to a recent Forbesarticle, the 15 percent income level for married joint filers is $17,850 to $72,500. The 25 percent income level for married joint filers is $72,500 to $146,400.

Getting as close as I can

Since the rates are "marginal rates," I don't owe one particular rate on all of our income. One CNBC article explained marginal tax rates as dividing a person's income into different sections. Each section has a different marginal tax rate. Once a person reaches a new marginal rate due to higher income, that rate applies only to the taxable income within that section. Even if I can't get us into the 15 percent tax bracket, I am still further ahead if our taxable income is on the lower end of the 25 percent tax bracket. It's not about working fewer hours or earning less money, but lowering our taxable income bysaving for retirement.

Setting up automatic deductions

One of the ways we lower our taxable income is by contributing to our 401(k) plans. I know the money I save into my Roth 401(k) won't lower our taxable income, but anything I put into the regular 401(k) will essentially be a tax write off that doesn't require itemization, according to a Turbo Tax article. I found if I automate my savings, I'm more likely to meet my retirement savings goals. I let my employer funnel 10 percent of my income into my 401(k) plan to lower my taxable income.

Using my flexible spending plan

Anther way I've been able to reduce my taxable income is by using a flexible spending plan for medical expenses. The flexible spending plan is a pre-tax plan that helps me pay for medical expenses. Each year, I change how much money I put into my spending plan and budget wisely. With some plans there is a "use it or lose it" stipulation, but with other medical health savings account the unused portion gets moved forward to the next year.

Trying new ideas

Although I've spent the last decade saving money into a 401(k) plan, I'm open-minded to other ways of reducing my tax liability. I recently read a Fox Business article about how taxpayers can reduce federal income tax liability. One idea was to turn to municipal bonds that provide tax-free interest. Although I haven't been able to qualify for the "saver's credit," I do receive the American opportunity credit for money spent on college tuition for my son.

I used to feel helpless when it came to the tax bill every year. After figuring out better ways to manage my money, I started to feel more in control of my tax destiny. I know the tax code is complicated, but I am no longer intimidated by it. Being more aware of what's offered each year gives me true taxpayer relief.