While no one in their right mind would generally turn down a raise, I recently found out that by getting a raise I would actually be losing money. Due to the way tax brackets work, I was just below the threshold for a bracket and upon getting a raise jumped into the next bracket. What I then did was figure out a good way to lower my taxable income to drop back down to my previous bracket so that my take home pay wouldn’t change, but I would have the added benefit of the money being put into whatever I chose to use to lower my income.
The best way I found to lower my income was to put the extra money into a 401k plan. This achieved the purpose of lowering my taxable income back into the tax bracket I wanted to be in while also letting me start saving for retirement. This option becomes even more attractive if you have a company that matches your 401k contributions. If they do, I would encourage you to at least contribute to the plan enough for them to be maxing out their contributions. Most companies will generally match up to 6% of your salary. Free money is always a good thing.
Two more very common ways of lowering your taxable income depend on whether you have children and whether you common visit a doctor. A health care flex plan is extremely useful if you do frequent the doctor’s office as you can place money into it completely tax free and then use it to pay doctor bills. This contribution amount is deducted from your taxable income which helps with dropping you to a lower tax bracket as well as saving you up to 35% on your doctor expenses because the money you contribute into the plan is tax free. The maximum amount you are able to contribute to this in a year though is $2,500.
If you have children that require child care you can contribute to a child-care reimbursement account to drop your income and give you some tax-free money for paying for child-care. This isn’tnearly as common with employers as the other two options are but some do offer it and utilizing it can save you a great deal on child-care costs.
The simplest way for me to correct my income was through an increased 401k contribution amount. With a cap of $17,500 per year on 401k contributions, it’s by far the most flexible and receptive option. Depending on your life circumstances however, you can make use of some other options available to you to lower your income to reduce the amount of taxes you have to pay while also reducing costs for many necessary bills along the way.