As the 2026 tax season approaches, Americans are facing limited options to reduce their current tax burden. However, planning ahead to save more money on next year’s taxes is a crucial consideration at this time.
Alexander Smith, a behavioral economist at Worcester Polytechnic Institute in Massachusetts, believes that by changing spending habits now, taxpayers can create a more optimistic outlook for tax deductions in the future.
Smith points out, “I don’t think they realize that if they understand how the tax system works, they could potentially save a significant amount of money.”
Many taxpayers, according to Smith, spend too much time searching for tax breaks and loopholes in last year’s income, but not enough time considering how to adjust current practices to reduce future tax burdens. He suggests that for those looking to save money, understanding your tax bracket is key.
Understanding your tax return and becoming familiar with marginal tax rates is important in a progressive tax system where tax rates increase as income levels rise. Knowing which tax bracket you fall into is crucial for tax planning.
For example, if your taxable income in 2025 was $75,000 as a single filer, the first $11,925 is taxed at a 10% federal rate, the portion between $11,926 and $48,475 is taxed at 12%, and any income above $48,475 is subject to a higher rate of 22%.
Smith suggests strategies to lower tax burdens, emphasizing the importance of understanding your tax bracket to effectively implement these strategies.
Four strategies to reduce tax burdens include:
1. Depositing money into tax-advantaged retirement accounts such as a 401(k) or IRA lowers taxable income. Smith notes that many individuals may not realize how much they could save by doing this.
For the 2025 tax year, the contribution limit for a 401(k) account is $23,500, with higher limits for older Americans.
Assuming a federal tax rate of 22% and an additional 3% state and local tax, contributing $1,000 to a 401(k) account directly reduces taxable income. Smith explains that this $1,000 could save you $250 in taxes.
2. Health Savings Accounts (HSAs) operate similarly to traditional 401(k) plans with pre-tax contributions. Contributing $1,000 to an HSA could save you $250 in taxes, and future withdrawals may be tax-free if used for eligible medical expenses.
For the 2025 tax year, a family can contribute up to $8,550 to an HSA.
Contributions to an HSA can be invested for growth or used for qualified medical expenses without incurring taxes, providing flexibility for healthcare expenses.
3. Taxpayers should understand the tax benefits of charitable donations. The IRS allows taxpayers to deduct donations to charitable organizations, with a limit set at half of adjusted gross income.
4. Tax-loss harvesting is a common strategy used by wealthier individuals during tax season. By selling underperforming investments and replacing them with similar investments, taxpayers can offset gains from other investments on their tax return.
Understanding and implementing these strategies can help taxpayers optimize their tax planning for current and future financial benefits.