how to reduce your taxes
there are numerous ways to reduce your taxable income for starters you can contribute the maximum to a retirement account at work such as a 401 k and or contribute to a traditional individual retirement account ira if you have the option of a high deductible health insurance plan at work and you open a health savings account hsa hsa contributions made by payroll deduction are excluded from your taxable income a flexible spending account fsa can also help to reduce your taxable income be sure to take advantage of tax credits you are eligible for too tax credits come directly off the amount you owe in taxes to the irs what s known as a dollar for dollar perk examples of tax credits include the child tax credit the earned income tax credit eitc the american opportunity tax credit the lifetime learning credit llc and the saver s credit if you have investments you can also lower your taxes on investment gains if you hold your stocks or other capital assets for more than a year before you sell them thereby turning any gains into long term gains these are taxed at a lower rate than short term capital gains which are taxed at ordinary income rates when the assets sold have been held for a year or less when you sell securities at a loss you can also use tax loss harvesting to offset a capital gains tax liability there are several online tax calculators you can use to estimate a tax refund or determine your tax withholding to ensure you don t have to pay extra taxes or a penalty when you file your tax return 12pros and cons of tax bracketstax brackets and the progressive tax system that they create contrast with a flat tax structure in which all individuals are taxed at the same rate regardless of their income levels higher income individuals are more able to pay income taxes and keep a good living standard low income individuals pay less leaving them more to support themselves tax deductions and credits give high income individuals tax relief while rewarding useful behavior such as donating to charity wealthy people end up paying a disproportionate amount of taxes brackets make the wealthy focus on finding tax loopholes that result in many underpaying their taxes depriving the government of revenue progressive taxation leads to reduced personal savings proponents of tax brackets and progressive tax systems contend that individuals with high incomes are better able to pay income taxes while maintaining a relatively high standard of living in contrast low income individuals who struggle to meet their basic needs should be subject to less taxation proponents stress that it is only fair that wealthy taxpayers pay more in taxes than the poor and the middle class offsetting the inequality of income distribution that makes the progressive taxation system progressive in both senses of the word it rises in stages and it is designed with help for lower income taxpayers in mind supporters maintain that this system can generate higher revenues for governments and still be fair by letting taxpayers lower their tax bill through adjustments such as tax deductions or tax credits for outlays such as charitable contributions the higher income that taxpayers realize can then be funneled back into the economy furthermore tax brackets have an automatic stabilizing effect on an individual s after tax income as a decrease in funds is counteracted by a decrease in the tax rate leaving the individual with a less substantial decrease opponents of tax brackets and progressive tax schedules argue that everyone is equal under the law regardless of income or economic status and that there should be no discrimination between rich and poor they also point out that progressive taxation can lead to a substantial discrepancy between the amount of tax that wealthy people pay and the amount of government representation that they receive some even point out that citizens get only one vote per person regardless of the personal or even national percentage of tax that they pay opponents also claim that higher taxation at higher income levels leads some wealthier individuals to exploit tax law loopholes to find creative ways to shelter earnings and assets they can actually end up paying less in taxes than the less well off depriving the government of revenue for example some american companies have relocated their headquarters abroad to avoid or reduce their u s corporate taxes history of federal tax bracketstax brackets have existed in the u s tax code since the inception of the very first income tax when the union government passed the revenue act of 1861 to help fund its war against the confederacy a second revenue act in 1862 established the first two tax brackets 3 for annual incomes from 600 to 10 000 and 5 on incomes above 10 000 the original four filing statuses were single married filing jointly married filing separately and head of household though rates were the same regardless of tax status 13in 1872 congress rescinded the income tax 14 it didn t reappear until the ratification of the 16th amendment to the u s constitution in 1913 established congress right to levy a federal income tax that same year congress enacted a 1 income tax for individuals earning more than 3 000 a year and couples earning more than 4 000 with a graduated surtax of 1 to 7 on incomes from 20 000 and up 1315over the years the number of tax brackets has fluctuated when the federal income tax began in 1913 there were seven tax brackets in 1918 the number mushroomed to 56 brackets ranging from 6 to 77 16 in 1944 the top rate hit 91 17 but it was brought back down to 70 in 1964 by then president lyndon b johnson 18 in 1981 then president ronald reagan initially brought the top rate down to 50 19then in the tax reform act of 1986 brackets were simplified and the rates were reduced so that in 1988 there were only two brackets 15 and 28 20 this system lasted only until 1991 when the third bracket of 31 was added 21 since then additional brackets have been implemented and we have come full circle and are back to seven brackets state tax bracketssome states have no income tax alaska florida nevada south dakota tennessee texas washington and wyoming 22 new hampshire doesn t tax earned wages but it does tax investment income and interest however it is set to phase out those taxes starting in 2023 bringing the number of states with no income tax to nine by the end of 2024 23in 2023 11 states had a flat rate structure with a single rate applying to a resident s income arizona 2 5 colorado 4 40 idaho 5 8 illinois 4 95 indiana 3 15 kentucky 4 5 massachusetts 5 0 michigan 4 25 north carolina 4 75 pennsylvania 3 07 and utah 4 85 22in other states the number of tax brackets varies from three to as many as nine in california and new york and even 12 in hawaii the marginal tax rates in these brackets also vary considerably california has the highest maxing out at 12 3 22state income tax regulations may or may not mirror federal rules for example some states allow residents to use the federal personal exemption and standard deduction amounts for figuring state income tax in contrast others have their own exemption and standard deduction amounts 22