What Is Taxable Income — and How Do You Legally Reduce It?

The Earned Income Tax Credit is one of the most valuable tax credits available — and one of the most frequently unclaimed. It’s a refundable credit for low-to-moderate income workers, meaning it can reduce your tax bill below zero and result in a refund even if you owe nothing. For 2026, the maximum EITC is $7,830 for families with three or more qualifying children. Single workers without children can also qualify — up to $632. Income limits apply: roughly $21,000 for single filers without children and $59,000 for married filers with three children. Use the IRS EITC Assistant at irs.gov to check your eligibility.

Capital gains tax applies to profits from selling investments (stocks, real estate, crypto). Short-term capital gains (assets held less than one year) are taxed at your ordinary income tax rate — the same as your W2 wages. Long-term capital gains (assets held more than one year) get preferential rates: 0%, 15%, or 20% depending on your taxable income. For 2026, the 0% long-term capital gains rate applies to taxable income up to $47,025 for single filers — meaning many middle-income investors pay nothing on investment profits if they hold assets long enough. This makes investment holding period a critical tax planning consideration.

The Child Tax Credit provides up to $2,000 per qualifying child under age 17. Up to $1,700 of this is refundable (meaning you can receive it even if your tax liability is zero) through the Additional Child Tax Credit. The credit begins to phase out at $200,000 of income for single filers and $400,000 for married couples. There’s also a $500 non-refundable Other Dependent Credit for qualifying dependents who don’t meet the child requirements. To claim it, you need your child’s Social Security number — make sure to have this ready when filing.

An IRS audit is a review of your tax return to verify accuracy. Most audits are conducted by mail (correspondence audits) — the IRS simply requests documentation for a specific item. Full in-person audits are rare and typically reserved for complex returns or significant discrepancies. Your odds of being audited are low: less than 0.5% of returns are audited. Red flags that can increase audit risk include large charitable deductions relative to income, claiming a home office deduction, not reporting 1099 income, and unusually high business expenses. Keep all supporting documents for at least 7 years after filing.