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 $23,500 into a 401(k), the first $7,000 into an IRA (if deductible), and the first $4,300 into an HSA can together remove $34,800 of taxable income. At a 22 percent marginal rate that is $7,656 of federal income tax saved, dropping the effective rate by nearly five points on a $100,000 income.

§ 2The Strategies

1

Maximize 401(k) Contributions

Limit. $23,500 (2026 employee limit; $31,000 if 50+)

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 $23,500 saves $5,170. At 24 percent, it saves $5,640. If your employer matches, capture the entire match before optimising elsewhere, that match is part of your salary.

2

Traditional IRA Contributions

Limit. $7,000 (2026; $8,000 if 50+); deductibility phases out above $87,000 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. $4,300 individual / $8,550 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 ($14,600 single, $29,200 MFJ in 2025). 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 $10,000

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

These deductions only matter if you itemise. The $10,000 SALT cap (state and local taxes) limits the value sharply for high 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

Solar, EV, and Energy Credits

Limit. Residential solar 30% credit; EV up to $7,500; energy efficiency credits up to $3,200/year

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

Tax credits are dollar-for-dollar reductions. The residential solar credit is currently 30 percent of installation cost. The EV credit (up to $7,500) has manufacturer, income, and assembly-location requirements. Energy efficiency credits cover heat pumps, insulation, and similar improvements with annual caps.

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

Baseline

Gross 100,000
Standard deduction 14,600
Taxable 85,400
Federal tax 13,702
Effective rate 13.7%

With 401(k) + HSA

Gross 100,000
401(k) 23,500 + HSA 4,300 = 27,800
Standard deduction 14,600
Taxable 57,600
Federal tax 6,510
Effective rate 6.5%

7.2 points off the effective rate. $7,192 saved this year. (Plus the $27,800 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.