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How to Lower Your Effective Tax Rate

By Maurie Backman - Apr 26, 2017 at 6:18PM

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Want to pay less tax going forward? Here's how to do it.

Though taxes are an inevitable part of life, most of us would rather pay less of them. If you're looking to lower your tax bill, it's important to understand how our tax system works.

The U.S. utilizes a progressive federal tax system, where the tax rate increases as earnings increase. As such, the more money you earn, the more money you pay -- but only on your highest dollars of income. In fact, while your marginal tax rate -- the rate at which your highest dollars of income are taxed -- might reach a certain threshold, your effective tax rate will typically be lower than your marginal rate.

Taxes graphic.

Image source: Getty Images.

Your effective tax rate is the overall rate at which your earned income is taxed. If you're unhappy with your effective tax rate, there are things you can do to lower that number and keep more of your money out of the IRS's hands.

Effective tax rates versus marginal tax rates

The tax bracket you fall into represents your marginal tax rate. Here's what those brackets look like today, based on your income and tax filing status:

Tax Bracket

Income Range: Single Tax Filers

Income Range: Married Filing Jointly




















$418,401 and above

$470,701 and above

Data source: IRS.

Just because you fall into a certain bracket, however, doesn't mean that you'll be paying that amount of tax on all of your income. Say you're a single tax filer earning $30,000 a year. Your first $9,325 of earnings will only be taxed at 10%, while your remaining $20,675 of earnings will be taxed at 15%. So, although you fall into the 15% tax bracket, your effective tax rate will only be 13.45%.

Now keep in mind that the above brackets might change if President Trump's tax proposal goes through. Here's what the new, simplified tax brackets look like under Trump's plan:

Tax Bracket

Income Range: Single Tax Filers

Income Range: Married Filing Jointly








$112,500 and above

$225,000 and above

Data source:

While we might see a reduction in the number of tax brackets out there, our country's core tax system will remain the same: Workers will pay higher taxes on their highest dollars of earnings, and most people will find that their effective tax rate is still lower than their marginal rate.

Tips for lowering your effective tax rate

Lowering your effective tax rate will reduce the amount of money you lose to taxes each year. There are several ways to accomplish this goal, but you can start with the following:

  • Contribute to a retirement account. The more money you put into your traditional IRA or 401(k), the more you'll lower your effective tax rate. That's because contributions to either type of account are made with pre-tax dollars. If you're under 50, the current annual limit for IRA contributions is $5,500, while the limit for 401(k)s is $18,000. If you're 50 or older, you can make catch-up contributions that raise these limits to $6,500 and $24,000, respectively.
  • Be more charitable. Donating money to charity can help lower your taxes because you get to write off whatever amount you end up contributing. But this provision applies to non-cash donations as well. If you donate used clothing, furniture, or household items to a registered charity, you can claim the fair market value of those goods on your tax return (meaning, the amount those goods would sell for in their current state). All you need to do is keep a detailed record of your donation history to back up your numbers.
  • Know your tax deductions. Tax deductions work by exempting a portion of your earnings from taxes, thus lowering your overall tax bill and rate. Homeowners can benefit from a number of deductions, such as the ability to write off mortgage interest, property taxes, points on a mortgage, or PMI (private mortgage insurance) premiums. If you spend a lot of money on healthcare, you may be eligible for a medical expense deduction if your total out-of-pocket costs exceed 10% of your adjusted gross income for the year. Finally, if you're a student, you may be eligible to deduct the cost of college tuition and fees, as well as the interest you pay on your student loans. These are only a few of the deductions out there, so it pays to see which others you might be eligible for.

Understanding how the tax system works is the first step toward tackling your personal IRS bill. With any luck, these tips will help you lower your effective tax rate -- and put more money back in your pocket, right where it belongs.

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