Make sure you’re ready for tax season with tax strategies that can help you lower your effective tax rate and save on your taxes. Our experts put together a list of helpful tips and tax credits that can help you lower your taxable income, including tax-free income opportunities.
NEW TAX LAW CHANGES
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
Lower rate means less tax
As you examine your taxes and seek ways to pay less, you might wonder if lowering your effective tax rate can help you reach that goal. The good news is that there are many legitimate options to lower your tax rate.
Before we get to the list of options for lowering your tax rate, you should first understand the difference between your effective tax rate and your marginal tax rate.
Marginal and effective tax rates
The first term we’ll discuss is the “marginal tax rate.” This is the highest tax bracket by which your income will be taxed.
- For instance, if you’re a single person whose taxable income was $80,000 in 2026, then you fall into the 22% tax bracket. Therefore, your marginal tax rate is 22%.
However, when talking about your marginal tax rate, it’s important to understand how tax brackets work. Many people believe that your tax bracket (aka your marginal tax rate) determines the rate you pay in taxes for your total taxable income. But being in the 22% bracket does not mean that you’ll pay 22% of your income in taxes.
It is true that the higher taxable income you have, the more you will pay in taxes. But it’s important to understand that the higher tax rate only applies to the amount of income above the minimum amount for that tax bracket.
Figuring out your tax liability, or how much you owe based on tax brackets, is easier to understand if you look at an example.
- So, let’s imagine a couple — John and Judy — that’s married filing jointly, and both are under the age of 65.
- Together, their taxable income in 2026 was $110,000.
This chart explains how much they will pay in taxes due to their marginal tax rate.
| Taxable Income (Married Filing Jointly) | Tax Rate | Calculation | Amount John and Judy Pay at This Rate |
| $24,800 | 10% | $24,800 – $0 = $24,800 x 10% tax rate = $2,480 | $2,480 |
| $76,000 | 12% | $100,800 – $24,800 = $76,000 x 12% tax rate = $9,120 | $9,120 |
| $9,200 | 22% | $110,000 – $100,800 = $9,200 x 22% tax rate = $2,024 | $2,024 |
Based on this tax bracket for 2026, John and Judy will owe a total tax liability of $13,624.
- $2,480 + $9,120 + $2,024 = $13,624
Your “effective tax rate” is the average percentage of your taxable income that you owe in federal taxes. In order to calculate this rate, you simply divide your tax liability (what you owe) by your total taxable income.
- In our example above, the effective tax rates calculation for John and Judy would be $13,624 divided by $110,000.
- Therefore, their effective tax rate is about 12.39%, which is much lower than their marginal tax rate of 22%.
It’s useful to know your effective tax rate so that you can make informed budget and planning decisions and lower your tax liability.
Options for lowering your effective tax rates
Now that you understand the term “effective tax rates,” let’s discuss how you can lower that percentage in order to minimize the amount you owe in taxes.
Consider tax-free income opportunities
Remember that the tax brackets and tax rates only apply to taxable income. There are several opportunities for you to make income or invest your income so that it isn’t taxable.
Some common types of tax-free income and investments include:
- financial gifts received from others
- disability insurance payments
- qualified withdrawals from a Roth IRA account
- selling your home and meeting the requirements to exclude the gain
- qualified municipal bonds interest income
Be strategic and smart about tax credits and deductions
As you make payments and purchases throughout the year, try to strategically plan them to maximize their effectiveness on your taxable income and tax rate. Additionally, it helps to keep some of the most common tax credits and deductions in mind, so you know what you’re working toward when it comes times to file.
- Child and Dependent Care Credit
- education tax credits
- adoption tax credit
- investment interest expense deduction
- charitable donations deductions
- casualty and theft losses deductions
- medical expenses deductions
- mortgage interest and points deductions
Getting started
Whether you’re setting yourself up for success in the beginning of the year or making adjustments in the latter half, there are multiple options for lowering your effective tax rate and paying less when the tax deadline comes.
To start, use a tax bracket calculator to understand your marginal tax rate and your effective tax rate. From there, you can consider applicable credits and deductions you qualify for and be well on your way to minimizing your taxes.
Your marginal tax rate is the top tax bracket that applies to your highest dollar of taxable income. Your effective tax rate is the actual average percentage of your total taxable income that you pay in federal taxes (calculated by dividing your total tax liability by your total taxable income).
No. The U.S. uses a progressive tax system, meaning your income is taxed in layers (or “buckets”). Crossing into a higher tax bracket only affects the portion of your income that falls above that specific threshold—it does not increase the tax rate on money earned in lower brackets.
Tax Deductions reduce your total taxable income. For example, a $1,000 deduction lowers the amount of income subject to tax.
Tax Credits directly lower your total tax liability dollar-for-dollar. A $1,000 tax credit reduces the actual amount you owe to the IRS by $1,000.
Common sources of tax-free or tax-advantaged income include:
Qualified withdrawals from a Roth IRA account
Interest income earned from qualified municipal bonds
Financial gifts received from family or friends
Excluded capital gains from selling your primary residence (if qualification requirements are met)
Qualified disability insurance payouts
Legislative updates often adjust standard deduction limits, state and local tax (SALT) caps, energy incentives, student loan rules, and credit limits. Staying updated ensures you adjust your spending, charitable contributions, and retirement contributions (like 401(k)s or IRAs) to maximize eligible savings each year.
Suresh holds a Master of Commerce (M.Com) degree and is a dedicated personal finance researcher and writer. Combining his advanced academic background in commerce with deep industry research, he covers complex topics like taxation, banking systems, credit analysis, and personal finance strategies. As the founder of Tax Assistant (taxassistant.org), Suresh is committed to translating complicated financial guidelines and economic data into simple, accurate, and actionable educational resources for everyday readers.
