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One Stop Shop For Understanding Tax Brackets (And How To Pay Less Through Deductions)

Fri Mar 13, 2015 14:59:17PM | Categories: Tax Brackets & Personal Tax Deductions
A one US-Dollar bill featuring George WashingtonBy: Mattes
Most people's goal every tax season is to figure out how to owe as little in taxes as possible. The purpose of this entry is to help you with that. The goal here is to show you a handful of ways that you can potentially lower your tax bracket through various personal deductions, thereby lowering the percentage you are taxed at, and save you money.

First off, let's get some definitions out of the way. Three terms that are very helpful to know in order to accomplish this task (that you are likely already somewhat familiar with) are: taxable income, tax brackets, and personal tax deductions.

All 3 work in conjunction with one another, for purposes of lowering your tax bracket. To start, the tax bracket is a table that tells you how much the federal government is going to tax your taxable income at, based on set bracket percentages. Depending upon your taxable income and where you fall on the table, you owe the corresponding percentage. Here is the table for 2014. The numbers change depending upon your filing status as well, demonstrated below:

Tax Rate / Single filers / Married filing jointly or qualifying widow(er) / Married filing separately / Head of household
10% --- Up to $9,075 / Up to $18,150 / Up to $9,075 / Up to $12,950
15% --- $9,076 - $36,900 / $18,151 - $73,800 / $9,076 - $36,900 / $12,951 - $49,400
25% --- $36,901 - $89,350 / $73,801 - $148,850 / $36,901 - $74,425 / $49,401 - $127,550
28% --- $89,351 - $186,350 / $148,851 - $226,850 / $74,426 - $113,425 / $127,551 - $206,600
33% --- $186,351 - $405,100 / $226,851 - $405,100$ / 113,426 - $202,550 / $206,601 - $405,100
35% --- $405,101 - $406,750 / $405,101 - $457,600 / $202,551 - $228,800 / $405,101 - $432,200
39.6% --- $406,751 or more / $457,601 or more / $228,801 or more / $432,201 or more


So this is the chart that you will use for 2014. Important to note, your income will be taxed by different percentages, the more that you earn. For example, if your taxable income is say $50,000 and you're filing status as 'single', then the first $9,075 will be taxed at 10% (the first bracket), and the next chunk up to $36,900 will be taxed at 15%, and the final ($50,000 - $36, 900) will be taxed at 25%. This is what is meant by a progressive tax system. You will not be charged a full 25% for all of your income. Hopefully that doesn't confuse you; it's a good thing the IRS does it this way.

Now the goal is to determine if you can lower your overall taxable income, so that you fall into a less expensive % category. That brings us to the second term: taxable income.

With help from USTaxCenter, this is defined as:

Taxable income, generally speaking, is the gross income of an individual or corporation, less any allowable tax deductions. Your taxable income is, in other words, the amount of your income that is subject to income tax.


So your taxable income is simply determined by subtracting your gross income by all your personal tax deductions for the year. And personal tax deductions are pretty self explanatory:

A deduction from gross income that arises due to various types of expenses incurred by a taxpayer. Tax deductions are removed from taxable income (adjusted gross income) and thus lower the overall tax-expense liability.


Now that the definitions are out of the way (hopefully that wasn't overkill) we can get on to the meat of the conversation: using deductions to lower your taxable income, to lower your tax bracket. The most common deductions that can accomplish this are:

1. Getting Married. As you can see from the tax bracket chart above, the difference from 'single' to 'married' status is up to double the income before you have to move down into a more expensive bracket. Especially if you are the main breadwinner and married, make extra certain you file as married over single, and reap the benefit of staying in a lower tax bracket, therefore assuring to save you thousands every year.

2. Contribute to either an employer retirement plan or open a traditional IRA account. Both of these moves can do wonders for your tax bill, not to mention your future retirement.

Courtesy of Chron.com:

Contribute to an employer retirement plan. You are allowed to reduce your gross salary by up to $16,500 each year with 401k contributions ($19,500 in 403b plans). If you are on the threshold, this can be a significant.

Open a traditional IRA and contribute. Speak with a tax adviser to confirm you meet eligibility requirements. If you do, the IRS allows you to contribute up to $5,000 ($6,000 for those older than age 50) into a traditional IRA and deduct this amount from your gross income for the year the contribution is made.


3. Contribute to Flexible Spending Accounts. That is, if your employer participates in such a plan. This is a great way to move money around into an account that isn't taxable in the traditional sense, and will lower your taxable income. Be sure and ask your employer if they have such a plan. Many do. Also, I must say to read the agreement and stipulations thoroughly. While this move is advantageous, know that any monies left in the account by the end of the year are likely to be lost. So plan accordingly and make sure and ask all necessary questions before entering into the program.

4. Itemize your deductions, and weigh that amount against your standard qualified deductions. Then simply take the bigger number. Many a times people just opt for the simpler route of taking standard deductions. And for good reason, it's much less work. Problem is, you could be missing out on hundreds or thousands in savings, that could drop you into a lower tax bracket as well.

It's best to consult a tax pro for help with all the finer details, but deductions include (but are not limited to): medical and dental costs, mortgage points, mortgage interest, property taxes, state income taxes, charitable contributions. Also potentially business expenses as well - operating costs, travel expenses, and the use of a home office.

5. Maximize Tax Credits. This deduction tool is sometimes too seldom used, but can really help. There are several federal programs that you might qualify for that give tax relief through credits. And this is just another way to lower your overall taxable income. Again, there is a list (from the IRS found here) that I recommend getting your research on about: earned income credit, first-time home buyer credit, child and dependent care credit, adoption credit, education credit, and retirement savings contributions credit.


As these are just some of the many ways to drop your taxable income and consequently lower your tax bracket % through tax deductions, I implore you to check out these many resources below that I used in conjunction with my prior knowledge and experience to write this blog entry. Good luck and I hope this helps!

For further clarification, and additional ideas:

Chron.com - How to Drop Into a Lower Tax Bracket
FindLaw.com - Ten Ways to Lower Your Taxes
U.S.News.com - 17 Legal Secrets to Reducing Your Taxes
TurboTax.com - 5 Ways to Reduce Your Taxes for Next Year
Bankrate.com - Legitimate Ways To Reduce Your Tax Bill
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