Key takeaways

• Pre-tax contributions to 401(k)s, IRAs, HSAs, and FSAs can lower adjusted gross income and reduce overall tax liability.
• Tax credits like the Child Tax Credit and Saver’s Credit reduce taxes owed and may even generate a refund.
• Combining deductions, credits, and tax-efficient strategies can potentially bring federal tax liability down to zero — even on six-figure incomes.

Taxes can be a substantial annual expense, with the average federal income tax liability coming in at $13,890, according to the latest IRS data.¹

Of course, this varies widely by income, given the progressive tax system for income taxes: The more you make, the higher the tax liability.

Regardless of how much you earn, is it possible to reduce your taxable income to result in a $0 federal tax bill? Careful tax planning could significantly reduce your tax burden, even if you have a relatively high income. Some examples below.

How much do Americans pay in federal income taxes?

During the most recent fiscal year (2024), the IRS collected more than $5.1 trillion in taxes and issued nearly $490.6 billion in tax refunds.²

Most of the federal tax burden fell on the highest income earners. According to the latest federal income tax data (tax year 2022), the top 50% of all taxpayers paid 97% of all individual income taxes, while the bottom 50% paid the remaining 3%.³

The state of the tax code

The Internal Revenue Code is complicated. However, the basic framework is simple: Your tax rate gets progressively higher as your income increases. The complexity arises from, among other things, the various types of income, as well as deductions and credits available to taxpayers who take advantage of them. Another consideration is that deductions and credits phase out as incomes increase.

The federal tax system is complex for many reasons, and new rules and policies are frequently created, which can make it challenging for the average taxpayer to keep up.

How to reduce federal taxable income

So, can the average American pay no federal taxes?

Some taxpayers, even those with income over $100,000, could pay zero federal income taxes. Regardless of your income or net worth, it’s financially prudent to consider available tax deductions and credits you may qualify for.

The examples below show how much federal income tax is ultimately owed after deductions and credits for a range of financial situations. Whether a household receives a refund depends on how much was already withheld from their paychecks.

John: 23-year-old recent college graduate

John is 23, single, and has no children. He earns $30,000 per year at his first full-time job. Because he lives with roommates and splits rent and utilities, John is comfortable living on $1,300 per month out of his $2,500 monthly gross pay, which allows him to prioritize retirement savings early in his career.

John contributes $1,000 per month to his employer’s 401(k), or $12,000 per year. Those contributions are made pre-tax, reducing the amount of income the IRS considers taxable.

Federal tax breakdown: How John’s income is taxed in 2026

Why John owes no federal income tax

After subtracting his 401(k) contributions, John’s adjusted gross income falls to $18,000. The 2026 standard deduction for single filers ($16,100) reduces his taxable income to just $1,900, which would normally result in $190 of federal income tax based on his tax bracket.

Because John saves for retirement and keeps his income below certain thresholds, he qualifies for the Retirement Savings Contributions Credit, often called the Saver’s Credit. For 2026, single filers with an adjusted gross income (AGI) of $24,250 or less qualify for the 50% credit, applied to up to $2,000 of retirement contributions.

Although John’s potential credit is as much as $1,000, the Saver’s Credit is not refundable and can only offset taxes owed. Since his tax bill is $190, the credit fully eliminates it.

The Smiths: married couple, 40 years old with two kids

The Smiths are both 40 years old, and they have two kids in elementary school. Together, they earn $140,000 per year from their full-time jobs.

The Smiths put a strong emphasis on retirement savings by contributing the maximum to their 401(k)s ($24,500 each in 2026) and traditional IRAs ($7,500 each in 2026). In total, they contribute $64,000 on a pre-tax basis to their retirement accounts.

Since the Smiths have two children in elementary school, they pay for after-school care during the school year and some childcare during the summer months. The total childcare costs amount to $8,000 per year. The Smiths contribute $7,500 in pre-tax dollars to a dependent care FSA spending account. The rest of their childcare costs are paid out of pocket. Similarly, Mrs. Smith contributes $3,050 in pre-tax dollars to her healthcare flexible spending account. With the family’s typical medical and dental expenses, they expect to use the $3,050 in full.

Federal tax breakdown: How the Smiths’ income is taxed in 2026

After subtracting their pre-tax contributions, the Smiths’ adjusted gross income falls to $65,450. The 2026 standard deduction for married couples filing jointly ($32,200) reduces their taxable income to $33,250, resulting in $3,550 in federal income tax.

Because the Smiths have two children, they qualify for $4,000 in Child Tax Credits. The nonrefundable portion eliminates their $3,550 tax bill. The remaining $450 qualifies as a refundable Additional Child Tax Credit, resulting in a $450 refund.

The Jacksons: married couple, 55 years old, empty nesters

The Jacksons are a 55-year old couple with a combined annual salaries of $125,000.

The couple raised two kids and are now looking forward to retirement within five years. The two Jackson children have finished college and are no longer dependents of their 55-year-old parents. The Jacksons have also recently paid off their 30-year mortgage on the house they bought as newlyweds.

Because both spouses are over age 50, they are eligible to make catch-up contributions to their retirement accounts in 2026. Each spouse can contribute up to $32,000 to a 401(k) plan ($24,500 regular contribution plus a $7,500 catch-up contribution) and $8,500 to a traditional IRA ($7,500 regular contribution plus a $1,000 catch-up contribution). By maximizing both accounts, the Jacksons contribute a combined total of $81,000 on a pre-tax basis to their retirement savings for the 2026 tax year.

In 2026, families can contribute up to $7,750 to a Health Savings Account (HSA). Because both Jacksons are age 55 or older, they can each make a $1,000 catch-up contribution, bringing their total maximum HSA contribution to $9,750. Unlike flexible spending accounts, HSA funds roll over from year to year if unused.

The Jacksons also manage a taxable brokerage account. Through tax-loss harvesting, Mrs. Jackson realizes at least $3,000 in capital losses annually, which can be used to offset gains or deduct up to $3,000 against ordinary income each year.

Federal tax breakdown: How the Jacksons’ income is taxed in 2026

After subtracting their pre-tax retirement contributions, HSA contributions, and capital loss deduction, the Jacksons’ adjusted gross income falls to $31,250. The 2026 standard deduction for married couples filing jointly ($32,200) reduces their taxable income to zero, leaving them with no federal income tax liability.

Because they have no remaining taxable income and do not qualify for refundable tax credits, their final federal income tax bill is $0. Any federal income tax withheld from their paychecks during the year would be refunded.

How to lower taxable income

With some planning, it isn’t impossible to file a 1040 that shows zero tax liability. The three examples highlighted in this article show illustrate hypothetical taxpayers with varied circumstances who managed to take advantage of available provisions to fully offset their respective tax liabilities – in some cases, despite earning six-figure salaries.

How did these taxpayers reach a zero-dollar tax bill, and how could you pay less in taxes? Consider:

• Contributing significant amounts to deductible retirement savings plans
• Participating in employer-sponsored benefit plans including those for childcare and healthcare
• Paying attention to items like child tax credits, the retirement saver's credit, and the dependent care credit.
• Managing investment income in a tax-efficient manner

Careful tax planning can potentially slash your tax bill, even if you have a fairly high income.