How Can I Lower My Tax Bill? Strategies to Reduce What You Owe

Taxes take a significant portion of your income, but there are legal ways to reduce what you owe. Many people overpay simply by not taking advantage of deductions, credits, and tax-efficient strategies. By being proactive, you can retain more of your earnings while staying compliant with tax laws.

Several options can lower your tax bill, including adjusting paycheck withholdings and making strategic contributions to retirement or health savings accounts. Understanding these strategies can significantly reduce your tax liability.

Itemized Deductions

Taxpayers must choose between the standard deduction and itemizing. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your deductible expenses exceed this amount, itemizing can lower your taxable income.

Mortgage interest is one of the largest deductions for homeowners. Interest on loans up to $750,000 is deductible for mortgages taken after December 15, 2017, while older loans may qualify for a $1 million cap. Property taxes are also deductible, but the total deduction for state and local taxes, including income or sales tax, is capped at $10,000.

Medical expenses exceeding 7.5% of adjusted gross income (AGI) are deductible, including out-of-pocket costs for doctor visits, prescriptions, and certain home modifications for medical reasons. Charitable contributions to qualified organizations are also deductible. Cash donations can be deducted up to 60% of AGI, while non-cash contributions, such as clothing or household items, require proper documentation.

Tax Credits

Unlike deductions, which reduce taxable income, tax credits directly lower the tax owed. Some credits are refundable, meaning they can generate a refund even if no tax is owed, while others are nonrefundable and only reduce liability to zero.

The Earned Income Tax Credit (EITC) helps low- to moderate-income workers. Eligibility depends on income, filing status, and the number of qualifying children. In 2024, a filer with three or more children could receive up to $7,830, while those without children may qualify for a smaller amount. The credit phases out as income increases.

The Child Tax Credit (CTC) provides up to $2,000 per child under 17, with up to $1,600 refundable. Phaseouts begin at $200,000 for single filers and $400,000 for married couples filing jointly. Those with dependents who don’t qualify for the CTC may claim the Credit for Other Dependents, which provides up to $500 per eligible individual.

Education-related credits can also reduce tax liability. The American Opportunity Tax Credit (AOTC) allows up to $2,500 per student for tuition, fees, and course materials, with up to $1,000 refundable. The Lifetime Learning Credit (LLC) provides up to $2,000 per return for tuition and fees but is nonrefundable. Both credits have income limits.

Homeowners making energy-efficient improvements may qualify for the Residential Clean Energy Credit, covering 30% of costs for solar panels, battery storage, and other renewable energy upgrades through 2032. The Energy Efficient Home Improvement Credit allows up to $1,200 annually for upgrades like insulation, efficient windows, and doors, with a separate $2,000 limit for heat pumps and biomass stoves.

Adjusting Withholdings

The amount withheld from your paycheck affects your financial situation. Withholding too much results in a large refund but means you’ve given the government an interest-free loan. Withholding too little can lead to an unexpected tax bill and penalties.

Updating Form W-4 with your employer ensures withholdings reflect your current situation, especially after life changes like marriage, divorce, or having a child. Those with multiple jobs or a working spouse should use the IRS Tax Withholding Estimator to avoid underpayment issues.

Freelancers, independent contractors, and those with significant non-wage income must make estimated tax payments quarterly to avoid penalties. Payments are due on April 15, June 15, September 15, and January 15 of the following year. The IRS requires at least 90% of the current year’s tax liability or 100% of the previous year’s amount to avoid underpayment penalties, which accrue interest based on the federal short-term rate plus 3%.

Strategic Retirement Contributions

Maximizing retirement contributions reduces taxable income while building long-term financial security. Contributions to traditional retirement accounts, such as a 401(k) or a traditional IRA, are tax-deferred. In 2024, employees can contribute up to $23,000 to a 401(k), with an additional $7,500 allowed for those aged 50 and older. For IRAs, the contribution limit is $7,000, with a $1,000 catch-up contribution for individuals over 50.

Employer-sponsored retirement plans offer additional benefits. Many companies provide matching contributions, which employees should take full advantage of. Some plans allow after-tax contributions that can later be converted to a Roth account, a strategy known as the “mega backdoor Roth conversion,” allowing for tax-free withdrawals in retirement.

Self-employed individuals have more options for tax-efficient retirement savings. SEP IRAs and Solo 401(k)s allow contributions of up to 25% of net earnings, with a maximum of $69,000 in 2024. Defined benefit plans offer even higher contribution limits, making them attractive for high-earning professionals looking to maximize deductions.

Health Savings Accounts

For those enrolled in a high-deductible health plan (HDHP), a Health Savings Account (HSA) offers tax advantages. Contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are not taxed. In 2024, individuals can contribute up to $4,150, while families can contribute up to $8,300. Those 55 and older can add an extra $1,000 as a catch-up contribution.

Unlike Flexible Spending Accounts (FSAs), which have a “use-it-or-lose-it” rule, HSA funds roll over indefinitely. Many people use HSAs as a long-term investment tool by paying current medical expenses out of pocket while allowing the account balance to grow. Some HSAs offer investment options similar to retirement accounts, enabling tax-free growth over decades. This strategy can help cover healthcare costs in retirement, as Medicare premiums and long-term care expenses qualify for tax-free withdrawals.

Tax-Exempt Investments

Investing in tax-advantaged assets can reduce tax liability while growing wealth efficiently. Municipal bonds, issued by state and local governments, provide interest income that is exempt from federal taxes and often state and local taxes if purchased within the investor’s state of residence. While municipal bonds generally offer lower yields than taxable bonds, the tax savings can result in a higher after-tax return.

Roth IRAs and Roth 401(k)s provide tax-free growth and withdrawals in retirement. Contributions are made with after-tax dollars, but qualified withdrawals, including earnings, are tax-free. This can benefit individuals who expect to be in a higher tax bracket later in life. Additionally, Roth accounts are not subject to required minimum distributions (RMDs), allowing assets to continue growing tax-free.

Investors can also consider tax-efficient mutual funds and exchange-traded funds (ETFs) that minimize capital gains distributions, reducing taxable events within a portfolio.