To significantly reduce your taxes now and in the future, you need to plan ahead. There are several strategies you can adopt to lower your tax bill.
If you contribute the maximum for 2025 ($23,500, or $31,000 for taxpayers 50 and over, or $34,750 for those aged 60-63) towards a pre-tax 401(k), you will greatly reduce your taxable income. If it's not possible to contribute the full amount, you should at least contribute the maximum amount that will be matched by your employer if they offer an employer matching program.
Health Savings Account, or HSAs, are perhaps the most underutilized tax-advantaged way to grow our money. Like a Roth, earnings are tax-free, but HSAs are also tax-deductible. So you save on taxes now and in the future. Your HSA earnings are tax-free if you use it for qualified medical expenses in the future.
Depending on which tax bracket you are in, and whether you can absorb a slight reduction in your take-home pay, consider switching all your future contributions from pre-tax to a Roth 401(k), if it’s an available option. This way, you will be able to pay taxes while your tax bracket is low, and thus avoid paying higher taxes when tax rates go back up.
There are many tax credits available. Each year the IRS releases the tax credits and deductions available to filers. It’s important that you take advantage of every tax credit that you are entitled to. Tax credits reduce the amount of tax that you owe, not just your taxable income
Roth IRAs are taxed up front. If you are eligible, the tax savings could be immense. While your Roth IRA contributions don’t lower your tax bill today, the money you withdraw when you retire, including earnings, will be tax-free.
You can take advantage of a charitable tax deduction through a standard donation or itemization. You can claim up to $300 in donations for the standard deduction. These donations must have been made in cash to 501(c)(3) charitable organizations. Cash donations include those made by credit card, check, or debit card.
What’s the difference between a tax deduction and a tax credit?
A tax deduction lowers the amount of your income that is subject to tax, while a tax credit directly reduces the tax you owe. Credits are typically more valuable because they reduce your tax bill dollar-for-dollar.
Can contributing to retirement accounts lower my taxes right away?
Yes. Contributions to pre-tax accounts like a traditional 401(k) or traditional IRA generally reduce your taxable income in the year they are made, which may lower your current tax bill.
Are Roth contributions tax-deductible today?
A: No. Roth contributions are made with after-tax dollars, so they do not reduce your taxes now. However, qualified withdrawals in retirement are tax-free.
Do Health Savings Accounts (HSAs) provide triple tax benefits?
A: Yes. Contributions are tax-deductible, growth is tax-deferred, and qualified withdrawals are tax-free. This makes HSAs one of the most tax-advantaged accounts available.
How do charitable donations affect my taxes?
Qualified donations to 501(c)(3) organizations may provide a tax deduction, either through itemizing or, in some cases, as an above-the-line deduction if you take the standard deduction. Always keep receipts for donations.
Is it smart to change tax strategies every year?
Tax strategies should be reviewed annually because your income, family situation, and tax laws may change. A consistent review helps ensure you’re maximizing available opportunities.
Should I get professional advice before making tax-related decisions?
Yes. A fiduciary financial planner or tax professional can help ensure that your strategies are tailored to your situation and compliant with current tax laws.
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