5 Legal Ways to Lower Your Taxable Income This Year

Taxes are inevitable, but paying more than you need to isn't. Here are five completely legal strategies to reduce your taxable income in 2026.

1. Maximize Your 401(k) Contributions

The 2026 401(k) contribution limit has increased to $23,500 (up from $23,000 in 2025). If you're 50 or older, you can contribute an additional $7,500 catch-up contribution.

The Math: If you're in the 22% federal bracket and max out your 401(k):

• Contribution: $23,500
• Tax savings: $5,170 in federal taxes alone
• State tax savings: Additional savings depending on your state

Pro Tip: If your employer offers a match, contribute at least enough to get the full match—it's free money.

2. Contribute to a Traditional IRA

For 2026, you can contribute up to $7,000 to a Traditional IRA ($8,000 if you're 50+). These contributions may be tax-deductible depending on your income and whether you have a workplace retirement plan.

Eligibility for Full Deduction (with workplace plan):

• Single filers: Income under $77,000
• Married filing jointly: Income under $123,000

3. Use a Health Savings Account (HSA)

If you have a high-deductible health plan (HDHP), an HSA is a triple tax advantage:

1. Contributions are tax-deductible
2. Growth is tax-free
3. Withdrawals for medical expenses are tax-free

2026 HSA Limits:

• Individual: $4,300
• Family: $8,550
• Catch-up (55+): Additional $1,000

This is the only account that offers tax benefits at contribution, growth, AND withdrawal.

4. Harvest Your Investment Losses

Tax-loss harvesting allows you to offset capital gains with capital losses. If your losses exceed your gains, you can deduct up to $3,000 against ordinary income.

Example:

• Sold Stock A for $5,000 profit
• Sold Stock B for $8,000 loss
• Net loss: $3,000 (fully deductible against income)

Warning: Avoid the "wash sale rule"—you can't buy substantially identical securities within 30 days.

5. Time Your Income and Deductions

If you have control over when you receive income (self-employed, bonuses, etc.):

If you expect lower income next year:

• Defer income to next year
• Accelerate deductions this year

If you expect higher income next year:

• Accelerate income this year
• Defer deductions to next year

Bonus: Don't Forget State-Specific Strategies

Different states offer different deductions:

• California: Allows 529 plan deduction
• New York: Has its own set of itemized deductions
• No-tax states: Focus on other tax-advantaged accounts

The Bottom Line

These five strategies can easily save the average American thousands of dollars in taxes. The key is planning ahead—most of these moves need to be made before December 31.

Use our salary calculator to see your current tax burden and plan your savings strategy.