While it sounds kind of obvious to obtain, it is important to reduce your adjusted net income (ANI) to manage any potential tax liability and optimize your financial outcomes. Additionally, it is worth remembering that ANI plays a vital role in determining your tax bracket and eligibility for tax credits and deductions.

For high-income earners, reducing adjusted net income can help you avoid hitting certain thresholds that trigger additional taxes, such as the Medicare surtax or phaseouts for certain deductions.

This guide breaks down practical strategies you can implement to lower your adjusted net income while adhering to IRS guidelines and staying tax-compliant.

Maximize contributions to tax-advantaged accounts

One of the simplest and most effective ways to reduce your adjusted net income is by making the most of tax-advantaged accounts, such as 401(k)s, Traditional IRAs, and Health Savings Accounts (HSAs). Contributions to these accounts are typically deducted from your taxable income, reducing your ANI.

For the year 2024, the IRS has set the 401(k) contribution limit at $23,000 for those under 50 and $30,500 for those 50 and older. One obvious tactic is to contribute the maximum allowed amount, so you can lower your taxable income significantly.

However, most people think that most employees who make over $100,000 each year already put money into retirement accounts that are not taxed. The average contribution is over $15,000.

Contributing to an HSA can also be a strategic way to reduce your ANI, as contributions are pre-tax and roll over year after year if not used. For 2024, the IRS has set the contribution limit for an individual HSA at $4,150, and for families, it’s $8,300.

Many taxpayers overlook the value of HSAs, but using them strategically for medical expenses can offer both short-term and long-term tax advantages.

Utilize tax-loss harvesting

Tax-loss harvesting is a method where investors sell underperforming assets at a loss to offset gains made in other areas, effectively reducing taxable income. In the last 20 years, tax-loss harvesting helped investors earn an average annual benefit of 0.95%, which is roughly equivalent to an additional 1% in terms of portfolio returns.

This method works particularly well for those with substantial investments in taxable brokerage accounts. You end up reducing your overall taxable income by offsetting gains with losses. Any excess losses (up to $3,000 per year) can even be deducted from other types of income, including wages, reducing your adjusted net income further.

Tip: Make sure to follow the IRS’s wash-sale rule. This rule prohibits taxpayers from claiming a loss on an investment if they purchase a substantially identical security within 30 days of the sale.

Deduct business expenses

For self-employed individuals and small business owners, deducting business expenses is a powerful way to reduce adjusted net income. The average small business owner in the U.S. claims about $10,000 in tax deductions annually, significantly lowering their taxable income.

Some common deductible expenses include office supplies, travel expenses, and even a portion of your home if you use it exclusively for business.

It is also worth noting that if you’re using your car for business purposes, you can deduct either the actual expenses incurred. These expenses can include fuel, repairs, and insurance, and you can use the IRS standard mileage rate—which for 2024 is set at 67 cents per mile—to make further deductions. Make sure to maintain detailed records of your expenses so you can claim every deduction available.

In addition to common expenses, less obvious deductions like depreciation on business equipment or software can add up over time. By accurately deducting these costs, you reduce your taxable income and, subsequently, your adjusted net income.

Charitable contributions

Another effective strategy for lowering your adjusted net income is making charitable contributions. Donations to qualified charities are deductible from your taxable income, helping you lower your ANI while supporting causes you care about. In 2023, the National Philanthropic Trust reported that Americans donated a total of $557 billion to charity.

In order to maximize the tax benefits of charitable contributions, you must itemize your deductions rather than taking the standard deduction.

If you’re a high-income earner, consider donating appreciated securities rather than cash. That way, you can avoid paying capital gains taxes on the appreciation while still receiving a deduction for the fair market value of the donation. This not only reduces your adjusted net income but also helps you manage your long-term tax obligations more efficiently.

Defer income

If you’re a business owner, freelancer, or high-income earner, deferring income to future tax years can help lower your adjusted net income for the current year. When you defer income, you can avoid hitting certain income thresholds that trigger additional taxes, such as the Medicare surtax, which applies to individuals earning more than $200,000 annually.

In fact, income deferral is one of the most underutilized strategies among high-net-worth individuals, despite the potential tax savings. For example, if you expect to make less money next year or pay less taxes, delaying a bonus or invoice until the next year can help you pay less tax in the current year.

This strategy is useful for business owners, who can delay billing clients or receiving payments until January if they foresee crossing a tax threshold in December. However, it’s important to ensure that the deferral is within IRS guidelines and doesn’t fall under constructive receipt, where the IRS considers the income to be taxable in the year it was made available.

The right plan for you

Reducing your adjusted net income requires a combination of strategic tax planning, informed decision-making, and diligent record-keeping. If you get it right, you could dramatically reduce your tax liability and potentially save thousands of dollars each year.

Since the U.S. tax code is around 70,000 pages long, and a headache for business owners at the best of times, it’s easy to overpay on your taxes. However, an experienced tax professional like David’s Family CPA can ensure that all strategies are aligned with your unique financial situation and IRS regulations.