How to Change Income Tax Brackets

1040 tax forms provide many clues to changing tax brackets.

The easiest way to determine how to change tax brackets is to study a 1040 tax return. This document describes how the tax code operates, detailing tax credits, deductions, exemptions, and tax shelter opportunities. A few methods, such as 401k investment, aren't found on the tax return, but still can be a powerful way of lowering your tax and overall tax bracket.

Instructions

1. 

   Dependents lower your tax obligation.

   Have more dependents. This may be a double-edged sword; although you save at tax time by claiming another dependent, you may spend this and more in food and shelter costs.

2. 

   IRA contributions may be tax deductible.

   Reduce your gross income. Retirement plans, such as a 401k or 403b aren't counted toward your gross income for tax purposes if you invest pretax dollars, so saving more in these plans could help lower your tax bracket. (reference 1, second question) Similarly, if you meet specific criteria, you may qualify to deduct a Traditional IRA contribution. If you're self-employed, consider starting a SEP, SIMPLE, or solo 401k plan. These allow you to potentially contribute far more than a Traditional IRA, and all can help lower your tax bracket.

3. 

   Switching your portfolio around could save tax dollars.

   Lower your investment income. If you aren't spending your investment income, you may be giving a portion of it away to the government on your tax return. Municipal bond income is tax free. (reference 2) Annuities grow tax-deferred until retirement. Before investing in these types of investments, make sure the fees and potential surrender charges justify the potential tax savings. (reference 3)

   Look at the investments inside your IRA versus those outside of tax shelters to make sure your large income earners--and taxable income investments--are inside the IRA. Those investments with little annual income, such as many stocks, are more tax-friendly and should be held in non-IRA accounts. By rearranging your portfolio you may be able to lower your tax bracket.

4. 

   License fees are deductible in most states.

   Increase your itemized deductions. In many states you're allowed to deduct license-plate costs. Charities can always use your support, and you receive a nice tax deduction for helping. It may be time to clean out the closets and make a trip to your favorite local charity. Make sure to keep receipts for all donations. (resource 1)

5. 

   Winter property taxes can be paid in December or January.

   Pay your winter tax bill creatively, if you're a homeowner. If you know that in one year you'll have a larger tax commitment than another, pay your winter tax bill in either December or January to maximize either year's deduction.

6. 

   Discuss parceling bonuses across the new year.

   Negotiate bonuses. If you're lucky enough to receive a bonus this year, ask if half of it can be paid in December and the remainder in January. This will help keep your tax bill lower, and can potentially help you lower your tax bracket for one of the years.

7. 

   Some real estate investments provide tax credits.

   Look for tax credits. Many home improvements may be eligible. In 2010, heating, ventilating, air conditioning, and insulation, among others, qualify for a tax credit if the products meet the government's standards for energy efficiency. (reference 5).

References

• 401k.org: Frequently Asked Questions
• Penn State University: Taxable vs. Tax-Exempt Bonds
• Reuters: Re-examining tax-deferred annuities
• US Department of Energy: Federal Tax Credits for Consumer Energy Efficiency

Resources

• IRS: Itemized Deductions