Simple Strategies to Pay Less Tax and Keep More of What You Earn
- With the right mix of tax-deferred and tax-free accounts, you can lower your taxable income today while creating more flexibility for the future.
- The structure of your business and how you track legitimate expenses can meaningfully reduce how much of your income is taxed each year.
- When you plan for capital gains through timing, gifting, or exchanges, you can turn major transactions into long-term opportunities to pay less tax.
Understanding How Taxes Work
Before you can find real ways to pay less tax, you have to understand how the system works. A lot of people assume that earning more automatically means paying dramatically more in taxes, but that’s not really how it works. Once you see how it truly works, you can make better decisions without fear of an unexpected bill.
The Power of Marginal Tax Brackets
One of the most misunderstood parts of our system is the marginal tax bracket. Many people think that if they move into a higher tax bracket, they have to pay a higher tax rate for their entire income. That’s simply not true.
We use a progressive tax system, which means your income is divided into layers. Each layer is taxed at its own rate. Only the next dollar you earn moves into a higher bracket.
For example, if you earned $120,000 a year, this is how your tax picture would look:
| Tax Bracket | Income Range | Tax on This Portion | How Much You Have to Pay |
| 10% | $0 – $11,925 | Income of $11,925 → Tax = $1,192.5 | $1,192.50 |
| 12% | $11,926 – $48,475 | Tax = (income − 11,925) × 12% | $4,392 |
| 22% | $48,476 – $103,350 | Tax = (income − 48,475) × 22% | $12,077 |
| 24% | $103,351 – $120,000 | Tax = (income − 103,350) × 24% | $3,996 |
| Total: $21,657.5 |
In this example, you would pay a total of around $21,650 in taxes. That means your effective tax rate (the average you actually pay) is about 18%, not 24%.
Understanding this helps you stop making fear-based decisions like turning down a raise, new consulting work, or a bonus because you think you’ll lose it all to taxes.
Once you see that only part of your income is taxed at those higher rates, you can focus on opportunities that grow your income and use strategies like retirement contributions or timing deductions to manage your overall tax picture more effectively.
Why Context Matters More Than Income
A $200,000 salary and $200,000 in business income can produce very different results. Employees earn, pay taxes, and then spend what’s left.
Business owners earn, spend on legitimate expenses, and pay taxes on what remains. That order alone can make a big difference.
Timing plays a role, too. Low-income years are often the best time to realize capital gains or make Roth conversions, while higher-income years are better for deferring income and maximizing deductions.
You can’t always control your income, but you can control how it moves through your financial life. When you plan ahead instead of reacting to your tax bill, you gain the clarity and confidence to pay less tax the right way.
Use Tax-Deferred and Tax-Free Accounts Wisely
If you want to pay less tax, one of the most effective things you can do is make the most of the accounts designed to help you do exactly that. Retirement accounts, in particular, let you decide whether you want to save on taxes today or in the future.
The key is using both tax-deferred and tax-free options in a way that fits your goals and cash flow.
Maximize Retirement Contributions
Contributing to tax-deferred accounts like 401(k)s, 403(b)s, SEP IRAs, or Solo 401(k)s lowers your taxable income now and helps your money grow for later.
For example, one of my clients contributed $25,000 to her retirement plan and saved more than $8,000 in federal taxes that year. That’s money that stayed in her pocket and continued to grow for her future.
If you’re self-employed, the opportunity is even greater. You can often contribute far more to retirement accounts (in some cases, over $200,000 a year) while reducing your taxable income.
The important part is consistency. Whether you contribute monthly or in one annual lump sum, make it a habit to use the full amount available to you each year. Over time, those contributions create both wealth and tax savings that compound together.
Consider Roth Accounts for Long-Term Freedom
While tax-deferred accounts save you money now, Roth IRAs and Roth 401(k)s give you freedom later. You contribute after-tax dollars today, but your withdrawals in retirement, including growth, are completely tax-free.
That can make a huge difference in your long-term flexibility. I’ve worked with clients who made Roth contributions in their 40s during lower-income years. Decades later, they now have access to a pool of tax-free money they can use without worrying about their tax bracket or future rate changes.
The best approach is often a mix of some money growing tax-deferred and some growing tax-free. That way, you have options and control when it’s time to withdraw.
Why Structure Matters When You’re Self-Employed
If you run your own business or work for yourself, your business structure plays a big role in how much tax you pay. The form you choose determines not just how income is reported, but which deductions you can take and how much flexibility you have.
For many entrepreneurs, the first big decision is whether to remain a sole proprietor or form an entity such as an LLC or S-Corporation. The right setup can lower self-employment taxes, open up retirement plan options, and create more opportunities for legitimate business deductions.
What matters most is how your structure aligns with your income and expenses. As your business grows, what worked in the early years might stop being efficient. Reviewing your setup every few years with your tax professional and financial planner can reveal better ways to organize your income, take deductions, and pay yourself more strategically.
The goal isn’t to hide money or play tax games. It’s to use the same legal frameworks available to every business owner to make your structure work for you, helping you pay less tax, build wealth, gain additional liability protection, and keep your financial life running smoothly.
Manage Capital Gains Strategically
Capital gains can create some of the largest unexpected tax bills, especially when you sell a home, business, or investment that has grown significantly in value. The good news is, with the right planning, you can manage when and how those gains are taxed and keep more of your profit.
Spread Gains Over Time
If you’re selling a business, investment property, or large holding, you may be able to structure the sale as an installment sale. Instead of receiving all the proceeds at once, you spread them over several years. That means you also spread the tax burden, keeping your income in lower brackets and potentially saving thousands.
For some sales, there’s also an intermediated installment option, which allows a third party to handle the transaction. That can give you more control over how and when income is recognized.
Use Low-Income Years to Your Advantage
Our capital gains system is progressive, just like regular income taxes. That means your rate can be low in lower-income years. If you’ve taken time off work, had a transition year, or realized less income for any reason, that’s often the perfect time to sell appreciated assets.
I often see clients use those years to rebalance portfolios, sell stock options, or trim concentrated holdings while minimizing or eliminating capital gains tax. With planning, even temporary dips in income can become long-term tax-saving opportunities.
Gift and Give Intentionally
Gifting appreciated assets instead of selling them and donating the proceeds can be a simple and powerful way to reduce taxes. You can gift assets to family members in lower tax brackets or donate them directly to charity. In both cases, you avoid the capital gains tax you’d owe if you sold the asset yourself.
You can also make qualified charitable donations directly from your retirement accounts if you’re over 70.5 years old. Again, this allows you to make a greater donation since the charity will have no taxes to pay on the liquidation of the gift.
Don’t forget the home sale exclusion. Up to $250,000 of gain for individuals or $500,000 for married couples filing jointly can be excluded on the federal level when selling your primary residence, as long as you’ve lived there for two of the past five years.
Strategic generosity can be one of the most rewarding ways to reduce taxes while supporting people and causes you care about.
Explore Exchanges and Exemptions
There are a few advanced tools that can defer or even eliminate capital gains tax when used correctly. A 1031 exchange lets you sell an investment property and reinvest in another similar property without triggering immediate taxes. A 1035 exchange offers similar benefits for certain insurance or annuity contracts.
If you own a qualifying small business, the Qualified Small Business Stock (QSBS) exemption can allow you to exclude up to 100% of the gain from selling shares, depending on how long you’ve held them and how the business is structured.
Finally, opportunity zone investments can offer both deferral and potential exclusion of capital gains when reinvested in designated areas, which is a great option to explore with your advisor if you have large unrealized gains.
Paying Less Tax Starts with a Smarter Plan
Paying less tax isn’t about finding loopholes or chasing one-time tricks. It’s about being intentional, understanding how your income, timing, and structure work together, and using those tools to make confident, proactive choices.
When you build a plan around clarity and consistency, taxes stop feeling like something that happens to you and become something you manage with purpose. You keep more of what you earn and stay aligned with the life you’re building.
If you’d like to see how a personalized plan could help you pay less tax while staying focused on your bigger goals, take the first step. Fill out my short questionnaire and see if we’re a good fit to work together.
Jessica Lanning, CFP®
Email: [email protected]
Phone: (415) 354-5699
LinkedIn: linkedin.com/in/jessicalanning
YouTube Channel: Lanning Financial on YouTube
Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.