Quick answer: In the US, the most reliable legal ways to cut your federal income tax are to claim every credit you qualify for, such as the Earned Income Tax Credit and the Child Tax Credit. Beyond that, contribute to tax-advantaged accounts such as a 401(k), IRA or 529 plan, itemise deductions only when they beat the standard deduction, and time asset sales sensibly. Several rules changed for 2026, including the end of the home energy credits, so check this year’s limits before you plan.
When tax season comes around, people look back at their income and spending for the year to find credits and deductions that reduce their tax bill. This guide covers the US federal income tax system run by the Internal Revenue Service (IRS). The figures are for tax years 2025 and 2026, as published by the IRS. State taxes and the tax rules of other countries, including India, work differently.
Credits and deductions: the difference
A tax credit reduces your tax bill dollar for dollar, and some credits are refundable even if you owe no tax. A deduction reduces your taxable income, so it saves you tax only at your marginal rate. Most deductions on Schedule A help only if you itemise. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly and $24,150 for heads of household. Many households are better off taking the standard deduction.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is a refundable credit for low- and moderate-income workers. For tax year 2025, the maximum credit is $8,046 with three or more qualifying children. The income limit for that tier is $68,675 for married couples filing jointly. With no qualifying children, the maximum is $649, and the income limits are much lower. Investment income must be $11,950 or less. For 2026, the maximum credit rises to $8,231.
An earlier version of this article put the maximum at about $6,000 and the income cut-off at $50,000. Both figures are now out of date. Use the IRS EITC tables for your filing status and number of children.
Start a business
Running a business gives you more control over how and when you pay tax. Genuine business expenses, the ordinary and necessary costs of running the business, can be deducted from business income. You may also be able to keep profits in the business instead of drawing all of it as personal income. Business deductions must be real and documented, and a business started only to create deductions will not hold up. A tax professional can explain the IRS rules for your situation. Our guide on starting a home-based business covers the practical side.
Check your investments
The right investment can lower your tax, but the best choice depends on your finances and circumstances, so a qualified financial planner is worth consulting. Do not let tax drive the whole decision. Saving some tax makes no sense if the investment loses your capital. Choose investments that work for you in both the short and the long run.
Reduce your tax with children and family credits
- Child Tax Credit: up to $2,200 per qualifying child under 17, of which up to $1,700 can be refunded if you have at least $2,500 of earned income. The full credit is available up to $200,000 of income ($400,000 for joint filers) and is reduced above that. An earlier version of this article said $1,000 per child, which is long out of date.
- Credit for Other Dependents: up to $500 for each dependent who does not qualify for the Child Tax Credit.
- Child and Dependent Care Credit: covers part of the cost of childcare that lets you work. From 2026, its maximum rate rises to 50%.
Alimony: the earlier version said alimony payments are tax deductible. That is now true only for divorce or separation agreements executed before 2019. Payments under agreements executed after 2018 are not deductible.
College savings with a 529 plan
Few parents use a 529 plan, yet earnings in one grow free of federal tax when the money is used for qualified education expenses. Qualified expenses are not limited to tuition. They include fees, books, room and board at an eligible institution, and computers used while the student is enrolled. A limited amount of elementary and secondary school tuition also counts each year. Contributions are not deductible on your federal return.
Adjusting finances as a couple
The earlier version suggested keeping interest-earning savings in the name of the lower-earning partner. For married couples filing jointly in the US, both incomes are combined on one return, so this generally makes no difference. It can matter in countries where couples are taxed separately. In the US, the more useful step is to compare filing jointly with filing separately, and to make sure both partners use their retirement account limits.
Mortgage interest
Mortgage interest payments on your main or second home are deductible only if you itemise. For homes bought after 15 December 2017, the limit is interest on up to $750,000 of mortgage debt ($375,000 if married filing separately).
The earlier version suggested keeping a mortgage longer to get more tax benefit. That rarely makes sense: every dollar of interest you pay saves you only a fraction of a dollar in tax, and only if you itemise. If you have the savings, paying off debt is often the better choice. Interest on a reverse mortgage loan cannot be deducted until it is actually paid, which is usually when the loan is repaid in full.
Retirement savings
Raising your retirement contributions lowers your take-home pay now, but it can cut your current tax bill and build long-term savings. Thinking about how much to save for retirement at different life stages helps you set a realistic target.
For 2026, the IRS limits are:
- 401(k) plans: $24,500, plus an $8,000 catch-up contribution if you are 50 or older. A higher catch-up of $11,250 applies at ages 60 to 63.
- IRAs: $7,500, plus a $1,100 catch-up at 50 or older.
Traditional 401(k) contributions are made before tax. Traditional IRA contributions may be deductible, but the deduction can be limited if you or your spouse has a workplace plan and your income is above set levels. Roth contributions are not deductible, but qualified withdrawals are tax free.
Give to charity
Donations to qualifying charities are deductible if you itemise. From tax year 2026, people who take the standard deduction can also deduct up to $1,000 in cash gifts to eligible charities ($2,000 for married couples filing jointly). Donations to donor-advised funds do not qualify for this.
Gifts to family members are different. They are not deductible from your income tax. The annual gift tax exclusion only lets you give up to a set amount per recipient without filing a gift tax return: $19,000 per recipient in both 2025 and 2026. With gift splitting, a married couple can give $38,000 per recipient. An earlier version of this article quoted $13,000 and $26,000, figures from earlier years.
Track your medical expenses
Some medical expenses are deductible, but only if you itemise, and only the part of your qualifying costs above 7.5% of your adjusted gross income. IRS Publication 502 lists items such as bandages, acupuncture, and breast pumps and supplies that assist lactation. Keep your receipts, and check the IRS publication for eligible items. Costs reimbursed by insurance do not count.
Home energy efficiency: credits have ended
This section has changed the most. The Energy Efficient Home Improvement Credit (for insulation, doors, windows and heat pumps) and the Residential Clean Energy Credit (for solar panels and similar systems) are not available for property placed in service after 31 December 2025. If you installed qualifying property during 2025, you can still claim the credit on your 2025 return. Improvements made in 2026 do not qualify. Energy upgrades can still cut your utility bills; see whether solar is a good investment for your home without the credit.
Pay attention to details when selling assets
If you are planning on selling an asset that is subject to capital gains tax, timing matters:
- Hold for more than a year. Assets held more than one year qualify for long-term capital gains rates of 0%, 15% or 20%, depending on your taxable income. Short-term gains are taxed at ordinary income rates. An earlier version of this article mentioned a “50% discount” on capital gains after a year. That is not a US rule; a similar discount exists in Australia.
- Offset gains with losses. Capital losses reduce capital gains. If losses exceed gains, up to $3,000 a year ($1,500 if married filing separately) can be deducted against other income, and the rest carries forward.
- Consider your income year. If your income varies, selling in a lower-income year can mean a lower rate on the gain.
For complex sales, get professional help. A tax attorney such as Dean Hines Tax Lawyer in Dayton, Ohio, or a certified public accountant can help you find the best way to reduce your tax when disposing of assets. Property can be an investment with its own tax rules; see how investing in real estate works.
This guide is general information, not tax advice. Your situation may differ, so check with a qualified tax professional.
Frequently asked questions
Should I itemise or take the standard deduction?
Itemise only if your deductions, such as mortgage interest, state and local taxes, charity and qualifying medical costs, add up to more than the standard deduction. For 2026, the standard deduction is $32,200 for married couples filing jointly.
Can I still get a tax credit for solar panels?
Not for systems placed in service after 31 December 2025. If yours was installed in 2025, you can claim the 30% credit on your 2025 return.
Are gifts to my children tax deductible?
No. Gifts to individuals are not deductible. Up to $19,000 per recipient in 2026 can be given without filing a gift tax return.
How much can I put in a 401(k) in 2026?
$24,500, plus an $8,000 catch-up if you are 50 or older, or $11,250 if you are aged 60 to 63.
Do these tips apply in India?
No. This guide covers US federal tax. Indian income tax has its own deductions and rules under the Income-tax Act, 2025, so check the Income Tax Department’s guidance or a chartered accountant.
Figures were checked in October 2026 against IRS publications and newsroom releases, including the 2026 inflation adjustments, the 2026 retirement plan limits and the IRS summary of the 2025 tax law changes. Limits change every year, so confirm them on irs.gov before you file.
