I recently got a new job with a salary that puts me in the 25% tax bracket (filing as single). I don't yet qualify for my employer's 401k plan so I can't use that to reduce my pretax income for the year. I still have the 401k from my previous employer and I'm planning on rolling it over into a traditional IRA. If I contribute the maximum amount ($5500?) I still end up a little bit over the income limit for the 15% tax bracket. Other than my IRA contribution, what additional investments or financial moves can I make in order to move myself into a lower tax bracket? If it makes a difference, I'm in my late twenties and am more than willing to put money into another type of retirement account.

  • 34
    Don't panic. You don't really "move" into a higher bracket. It's only the income that's above the lower limit of the bracket that's taxed at the higher rate. Everything below that is taxed at the lower rate. All other things being equal, your income after taxes will go up. Aug 10 '15 at 23:19
  • Do you hit the 25% bracket based on a full years salary? or based on the combination of the previous job and the new job, both of which are partial years? Do you itemize? Aug 11 '15 at 10:09
  • @mhoran_psprep The 25% is based on the combination of my previous job and my new one. I also do not itemize, the standard deduction is what I normally use.
    – ovaltein
    Aug 11 '15 at 12:57
  • 1
    Congrats by the way!
    – Joel B
    Aug 11 '15 at 18:24
  • 1
    PeteBecker is correct. It's crazy how many people don't understand how tax brackets work. Aug 12 '15 at 12:39

It is important to remember that the tax brackets in the U.S. are marginal. This means that the first part of your income is taxed at 10%, the next part at 15%, next at 25%, etc. Therefore, if you find yourself just on the edge of a tax bracket, it really does not make any difference which side of that line you end up falling on.

That having been said, of course, reducing your taxable income reduces your taxes. There are lots of deductions you can take, if you qualify. Depending on what type of health insurance coverage you have, a Health Savings Account (HSA) is a great way to shelter some income from taxes. Charitable contributions are also an easy way to reduce your taxes; you don't really personally benefit from them, but if you'd rather send your money to a good cause than to Uncle Sam, that's an easy way to do it.

  • 7
    What you say is true, but that is not what "progressive" means. What you are saying is that the rates are marginal. ("Progressive" means that the rates increase as your income increases, rather than staying flat or going down.)
    – BrenBarn
    Aug 11 '15 at 2:25
  • @BrenBarn You are right, of course. Fixed. Thanks. Aug 11 '15 at 3:30
  • @BenMiller This is good information. I was looking at it as 25% of my total income. I'll leave this question open a bit longer for any other responses before marking an accepted answer. Thanks!
    – ovaltein
    Aug 11 '15 at 13:00
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    This is true as long as you don't have any deductions that "fall off" or phase out at certain income levels. If your income pushes you out of different deductions you might have a much higher "effective marginal" tax rate. For example, the savers tax credit has a very steep cliff. Most tax credits phase out gradually but this still means that even if your marginal tax rate is 15% your actual increase in federal taxes based on another $1000 income might actually be more than $150.
    – enderland
    Aug 11 '15 at 14:03

Can you make use of an HSA (health savings account) or a medical FSA (flexible spending account)? Depending on your medical coverage, one of these may be available to you.

Buying a house usually does the trick, between property tax and interest, it's not tough to have quite a bit in deductions. Of course, you need to want a house in the first place.


Some employers offer commuter benefits that allow you to pay some commuter costs (trains, parking, bikes, vansharing, etc) with pre-tax money (up to $120ish a month). Employers commonly use companies such as WageWorks to provide this benefit. This would lower your taxable income by over $1000 per year.


Based on your comment that you do not itemize your deductions, I think that's probably the next step for you to consider. Many of the suggestions that we would give require that you itemize.

If you are not familiar with the potential deductions it would probably be worth your while to visit with a local tax professional and discuss your expenses including what changes you could make to minimize your tax bill.

Ultimately becoming eligible for the 401(k) if possible will allow you access to the biggest avenue for reducing tax liability. It sounds like you are already prioritizing and saving for retirement through your IRA, but most earners in the 25% bracket can't put the recommended 15% into savings (with tax advantages) through an IRA.

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