If you pay taxes in the US, you are one of many. Millions of Americans file tax returns every year. According to the IRS, more than 150 million individual tax returns were filed in 2023. This means the majority of working adults are contributing to the nation’s tax system, each falling into one of several tax brackets. The decisions you make about your income, deductions, and credits determine how much you keep—and how much you pay.
But how many people actually spend the time to read and understand their tax returns? What are the insights you can learn from your tax return?
As it happens, your tax return is a goldmine of information. It tells you how much you earned, where your money went, and, importantly, which tax bracket you fall into. Understanding your tax bracket is key to making smarter financial decisions. Whether you want to save more money now or set yourself up for long-term success, learning how to improve your tax bracket can help you reach your financial goals.
This doesn’t mean everyone should aim for the lowest possible tax bracket. Sometimes, improving your tax bracket means raising it intentionally to secure long-term benefits. Let’s break it all down—starting with what tax brackets are and moving on to practical strategies you can use.
What Are Tax Brackets?
Tax brackets are the government’s way of dividing your income into chunks that are taxed at different rates. The U.S. uses a progressive tax system, meaning that as your income increases, only the amount within a specific bracket gets taxed at that rate. Bear in mind that if you knew your previous tax bracket, there is no guarantee that you’ve remained in the same one throughout the years. Tax brackets change regularly!
For example, in 2024, single filers pay 10% on income up to $11,000, 12% on the portion between $11,001 and $44,725, and so on. The highest rate, 37%, applies to income over $578,125.
It’s important to note the difference between your marginal tax rate and your effective tax rate. Your marginal rate is the highest bracket your income touches, while your effective rate is the average percentage you actually pay after deductions, credits, and other adjustments.
What Does It Mean to Improve Your Tax Bracket?
Improving your tax bracket doesn’t always mean lowering it. For many people, staying in a lower bracket saves money in the short term, but for others, climbing into a higher bracket might be worth it for long-term benefits. This depends on your financial goals.
Lowering your tax bracket means reducing your taxable income, which can free up more money for savings or other priorities. On the other hand, raising your tax bracket typically happens when you increase your income. While paying more taxes might seem counterintuitive, the extra income can open doors to better financial opportunities, like funding retirement accounts or paying off debt faster. It’s not about avoiding taxes—it’s about paying them strategically.
Strategies to Lower Your Tax Bracket
One of the most common goals is to lower your tax bracket. Here are practical ways to make that happen:
- Maximize Tax-Deductible Contributions. Contributions to accounts like 401(k)s, traditional IRAs, or HSAs reduce your taxable income. For example, in 2024, you can contribute up to $22,500 to a 401(k) if you’re under 50, or $30,000 if you’re older. Every dollar you contribute is a dollar that doesn’t get taxed this year.
- Leverage Tax Credits. Tax credits are even more powerful than deductions because they reduce your tax bill directly. For example, the Earned Income Tax Credit (EITC) is designed to help low-to-moderate-income workers, while the Child Tax Credit provides up to $2,000 per child. These credits can significantly reduce the taxes you owe.
- Harvest Capital Losses. If you’ve invested in stocks or mutual funds, tax-loss harvesting allows you to sell losing investments to offset gains from winning ones. For example, if you made $1,000 in profits but lost $500 in another investment, selling the loss brings your taxable gain down to $500.
- Make Charitable Contributions. Donations to qualified charities can lower your taxable income while supporting causes you care about. For larger donations, consider setting up a donor-advised fund to plan contributions over time and maximize the tax benefits.
- Adjust Income Timing. If you can control when you receive income, delaying it until the following tax year might keep you in a lower bracket. This strategy works well for self-employed individuals, freelancers, or consultants.
When Raising Your Tax Bracket Makes Sense
Raising your tax bracket isn’t something that happens by magic. It often requires hard work and planning, like learning a new skill, earning a promotion, or starting a side hustle. Increasing your income is the most common way to move into a higher bracket. While this means paying more taxes, the benefits of a higher income often outweigh the costs.
For example, earning more might allow you to save more in tax-advantaged accounts, pay off debt, or invest in opportunities that grow your wealth. One popular strategy is the Roth IRA conversion. This involves paying taxes now to convert traditional IRA funds into a Roth IRA, where they grow tax-free and can be withdrawn tax-free in retirement. This makes sense if you expect to earn more in the future or if tax rates rise.
Raising your bracket might also be intentional in low-income years. For example, if you’re temporarily earning less—perhaps due to a job change or starting a business—it’s a good time to sell appreciated investments or do a Roth conversion while staying in a lower tax bracket.
Tax Brackets and Financial Goals
Whether you aim to lower or raise your tax bracket, the key is aligning tax strategies with your overall financial goals. For instance, if you’re focused on saving for retirement, lowering your bracket by maxing out a 401(k) or IRA makes sense. On the other hand, if your goal is to build wealth faster, increasing your income might provide the resources you need to make bigger investments.
Understanding your effective tax rate is crucial here. Just because you move into a higher bracket doesn’t mean all your income is taxed at that rate. For example, if you earn $1,000 more than the threshold for your current bracket, only that $1,000 is taxed at the higher rate—not your entire income. This nuance helps avoid fear of “bracket creep” and empowers you to make better decisions.
Tools and Resources to Help You Adjust Your Tax Bracket
Making the most of your tax bracket requires the right tools and guidance. Tax software like TurboTax or H&R Block can simulate how different actions—like increasing deductions or contributing to retirement accounts—affect your taxes. Many employers also offer tax-saving benefits like Flexible Spending Accounts (FSAs) or dependent care accounts.
Consulting a financial planner or tax advisor can be especially helpful for complex strategies like Roth conversions or business deductions. They can provide a clear roadmap based on your specific situation, helping you balance short-term savings with long-term goals.
The bottom line, improving your tax bracket isn’t about avoiding taxes—it’s about managing them wisely. Whether you aim to lower your bracket to save more now or increase it to build wealth faster, the right strategies can help you get there.
Small changes, like contributing to a retirement account or learning a new skill, can make a big difference over time. Take control of your tax bracket today, and you’ll be setting yourself up for a stronger financial future.
This article is informational in nature and not intended as financial advice.