The Tax MathNotebook

§ V

Chapter V

Filed under: 401(k), HSA, IRA, harvesting, bunching, QBI, energy credits.

Eight Strategies to Lower Your Effective Tax Rate

Eight legitimate, code-compliant strategies, with the typical rate-point reduction each one buys for a $100,000 single filer.

§ 1

The taxonomy

Three families: pre-tax accounts, deductions, and credits. Each works differently on the effective rate.

Strategies that lower the effective rate fall into three families. Pre-tax account contributions (401(k), traditional IRA, HSA) reduce taxable income directly. Deductions reduce taxable income but only beat the standard deduction in aggregate when itemized. Credits reduce tax dollar-for-dollar regardless of bracket.

For most middle-income earners, maxing the pre-tax accounts is the single largest lever. The first $24,500 into a 401(k), the first $7,500 into an IRA (if deductible), and the first $4,400 into an HSA can together remove $36,400 of taxable income. At a 22 percent marginal rate that is roughly $7,700 of federal income tax saved, dropping the effective rate by nearly eight points on a $100,000 income.

§ 2The Strategies

1

Maximize 401(k) Contributions

Limit. $24,500 (2026 employee limit; $32,500 if 50+, $35,750 if 60-63)

Typical impact. Up to 5 points off effective at typical incomes

The largest pre-tax deduction most employees have access to. Each contributed dollar reduces taxable income by one dollar, saving the marginal rate in tax. At a 22 percent marginal rate, the full $24,500 saves $5,390. At 24 percent, it saves $5,880. If your employer matches, capture the entire match before optimising elsewhere, that match is part of your salary.

2

Traditional IRA Contributions

Limit. $7,500 (2026; $8,500 if 50+); deductibility phases out at higher MAGI for those covered by a workplace plan

Typical impact. 0.5 to 1.5 points off effective

If you are eligible, a deductible traditional IRA contribution reduces taxable income exactly like a 401(k). Most useful when the workplace plan is already maxed, or when there is no workplace plan at all. The Roth IRA does not reduce current-year taxes; it shelters future growth instead.

3

Health Savings Account

Limit. $4,400 individual / $8,750 family (2026)

Typical impact. 0.4 to 1 point off effective

Triple tax advantage: deductible going in, tax-free growth, and tax-free withdrawals for qualified medical expenses. Requires a high-deductible health plan to contribute. The most underused account in personal finance.

4

Tax-Loss Harvesting

Limit. $3,000 net loss against ordinary income per year (unlimited carryforward)

Typical impact. 0.1 to 0.5 points off effective

Selling losing investments to realise the loss, offsetting gains and up to $3,000 of ordinary income. Best done in late December against the year's gains, with attention to the wash-sale rule (no buying a substantially identical security within 30 days on either side of the sale).

5

Charitable Contributions (Itemized)

Limit. Up to 60% of AGI for cash gifts to qualifying public charities

Typical impact. Variable; only useful if itemising beats the standard deduction

Charitable deductions only help if total itemized deductions exceed the standard deduction ($16,100 single, $32,200 MFJ in 2026). Bunching strategy: combine two or three years of giving into a single year, itemise that year, and take the standard deduction in off years. A donor-advised fund makes this simple.

6

Mortgage Interest and SALT

Limit. Mortgage interest on up to $750,000 of debt; SALT capped at $40,000 for 2026 (phases down above $500,000 income)

Typical impact. 0 to 3 points off effective for high-income homeowners in high-tax states

These deductions only matter if you itemise. The One Big Beautiful Bill Act raised the SALT (state and local tax) cap from $10,000 to $40,000 for 2025 through 2029, roughly $40,400 in 2026 with the annual 1 percent step-up. The cap phases back down toward $10,000 once income passes $500,000, so the relief is smaller for the highest earners in California, New York, and similar states. The mortgage interest deduction's value falls each year of a fixed-rate loan as the interest portion shrinks.

7

Self-Employment Deductions and QBI

Limit. Half of SE tax, business expenses, plus 20% QBI deduction with phase-outs

Typical impact. 2 to 5 points off effective for qualifying small-business income

Self-employed filers get the SE-tax-half deduction, the home-office deduction (if elected), legitimate business expenses, and a 20% deduction on qualified business income (subject to income and trade limits). For S-corp owners, reasonable salary planning interacts with SE-tax obligations and is worth professional advice.

8

Tax Credits: Child, Education, and Saver's

Limit. Child tax credit $2,200/child; American Opportunity credit up to $2,500; Saver's Credit up to $1,000

Typical impact. Direct dollar-for-dollar reduction in tax owed

Tax credits are dollar-for-dollar reductions, worth far more per dollar than deductions. The child tax credit is $2,200 per qualifying child, made permanent and partially refundable up to $1,700 by the One Big Beautiful Bill Act. Education credits (American Opportunity, Lifetime Learning) and the Saver's Credit for retirement contributions add further direct reductions. Note: the residential clean energy (solar, 25D), energy-efficiency (25C), and clean-vehicle (EV, 30D/25E) credits were repealed by the same Act and are no longer available for 2026.

§ 3A Combined Example: $100,000 Single Filer

Baseline

Gross 100,000
Standard deduction 16,100
Taxable 83,900
Federal tax 13,170
Effective rate 13.2%

With 401(k) + HSA

Gross 100,000
401(k) 24,500 + HSA 4,400 = 28,900
Standard deduction 16,100
Taxable 55,000
Federal tax 6,812
Effective rate 6.8%

6.4 points off the effective rate. $6,358 saved this year. (Plus the $28,900 stays invested for retirement.)

§ 4What Does Not Work

Two persistent myths deserve mention. First, no legal strategy will get a high-W-2 earner to zero federal tax, the income is reported, the deductions are bounded, and audits are real. Second, "writing off" a business expense reduces tax by the marginal rate, not by the full amount. Spending one dollar to save twenty-four cents at the 24 percent bracket is not a saving; it is a 76-cent expense that happens to be deductible. Buy what you would have bought anyway, and deduct it correctly.