How taxable income is calculated
Start with your gross income, subtract above-the-line deductions to get your adjusted gross income (AGI), then subtract the standard deduction or itemized deductions to land on taxable income.
total income - above-the-line adjustments = AGI
AGI - deductions = taxable income
Say you earn $60,000 and claim $3,000 in above-the-line deductions:
$60,000 - $3,000 = $57,000 AGI
$57,000 - $16,100 standard deduction = $40,900 in taxable income
Contribute to pre-tax retirement accounts
Contributions to a traditional 401(k) generally reduce your taxable wages, while deductible traditional IRA contributions can reduce your AGI.
| Account | 2026 limit | Who can use it |
|---|---|---|
| 401(k)/403(b)/457 | $24,500 ($32,500 age 50+) | Employees with a workplace plan |
| Traditional IRA | $7,500 ($8,600 age 50+) | Anyone with earned income; deduction phases out if you’re covered by a workplace plan |
| SEP-IRA | Up to 25% of compensation or $72,000 (whichever is lower) | Self-employed workers |
Source: Internal Revenue Service
Use a health savings account
An HSA offers a triple tax benefit:
- Contributions lower your taxable income
- Growth is tax-deferred
- Withdrawals for qualified medical expenses are tax-free
For 2026, you can contribute up to $4,300 (individual) or $8,550 (family) if you’re enrolled in a high-deductible health plan.
Claim above-the-line deductions
Above-the-line deductions reduce your AGI whether or not you itemize:
- Student loan interest
- Educator expenses
- Self-employed health insurance
- Half of self-employment tax
Eligible workers may also claim the new One Big Beautiful Bill Act (OBBBA) deductions for tip income (up to $25,000) and overtime pay.
Standard deduction vs. itemizing
For 2026, the standard deduction is $16,100 (single), $32,200 (married filing jointly), or $24,150 (head of household). Itemizing may exceed the standard deduction if you have significant write-offs like mortgage interest, state and local taxes (SALT), significant medical expenses, or charitable giving.
Charitable deductions and qualified charitable distributions
Cash donations to qualified charities are deductible if you itemize, up to 60% of your AGI—one of several tax deductions that can shrink what you owe. If you’re 70½ or older, a qualified charitable distribution (QCD) lets you send up to $111,000 from an IRA directly to charity in 2026, satisfying your required minimum distribution without the amount counting as taxable income, even if you take the standard deduction.
Strategies for self-employed taxpayers
Self-employed filers can deduct Schedule C business expenses—home office, vehicle, equipment—plus the self-employed health insurance deduction, and contribute to a SEP-IRA.
Tax-loss harvesting and investment income
Selling losing investments to offset gains can reduce up to $3,000 of ordinary income per year through tax-loss harvesting. Municipal bond interest is federally tax-exempt, and qualified dividends and long-term capital gains are taxed at 0%, 15%, or 20%. These topics can be more challenging to identify, so it’s best to speak to a financial and tax professional about your specific situation.
