How to Cut Taxes: Strategies to Lower Your Tax Bill

Proactive tax planning is a legal approach to managing personal finances with the objective of minimizing taxes owed. This involves understanding and using the tax code to your advantage throughout the year, not just at filing time. By making informed financial choices and structuring transactions to be tax-efficient, you can retain a larger portion of your income and align financial goals with tax-saving measures.

Reducing Taxable Income with Deductions

A tax deduction is an expense the IRS allows you to subtract from your gross income, which reduces your adjusted gross income (AGI). You must choose between taking the standard deduction or itemizing deductions. The standard deduction is a fixed amount based on your filing status; for 2025 it is $15,000 for single filers and $30,000 for married couples filing jointly. You should itemize only if your total deductible expenses exceed your standard deduction amount.

Common itemized deductions include:

• Mortgage Interest: You can generally deduct the interest paid on up to $750,000 of mortgage debt used to buy, build, or substantially improve your primary or second home. This limit applies to mortgages originated after December 15, 2017; for older mortgages, the previous limit of $1 million in debt applies.
• State and Local Taxes (SALT): This includes property taxes and either state income or sales taxes, as you must choose one to deduct. The total amount you can deduct for SALT is capped at $10,000 per household per year.
• Charitable Contributions: For cash donations to qualified organizations, you can deduct an amount up to 60% of your AGI. When donating non-cash items, the deduction is limited to the item’s fair market value, and a receipt is needed for any contribution of $250 or more.
• Medical Expenses: Unreimbursed medical and dental costs that exceed 7.5% of your AGI are deductible. This includes a wide range of expenses, from doctor’s visits and hospital stays to prescription drugs.

A strategy known as “bunching” can be useful for charitable giving. This involves concentrating multiple years’ worth of donations into a single year. This may allow you to exceed the standard deduction threshold and itemize in that year, while taking the standard deduction in the other years.

Beyond itemized deductions, “above-the-line” deductions are subtracted from gross income to find your AGI and are available even if you take the standard deduction. One is for student loan interest, allowing a deduction of up to $2,500, subject to income limitations. Another allows eligible K-12 educators to deduct up to $300 for unreimbursed classroom expenses.

Claiming Tax Credits to Lower Your Tax Owed

A tax credit reduces your tax liability on a dollar-for-dollar basis, making it more impactful than a deduction. Credits can be nonrefundable, meaning they can only reduce your tax to zero, or refundable, which can result in a tax refund if the credit exceeds your tax liability. Some credits are partially refundable.

The Child Tax Credit is worth up to $2,000 for each qualifying child under the age of 17. To qualify, the child must be your dependent and live with you for more than half the year. The credit is partially refundable, with up to $1,700 per child available as a refund, and is available to those with a modified adjusted gross income (MAGI) up to $200,000 for single filers and $400,000 for joint filers.

For higher education, the American Opportunity Tax Credit (AOTC) provides up to $2,500 per student for the first four years, with up to $1,000 being refundable. The Lifetime Learning Credit (LLC) is a nonrefundable credit worth up to $2,000 per tax return for a broader range of courses. To claim the full amount for either credit, your MAGI must be $80,000 or less for single filers or $160,000 or less for joint filers, and you cannot claim both for the same student in the same year.

Tax credits are also available for home energy improvements. The Energy Efficient Home Improvement Credit is 30% of the cost of items like new windows, with an annual limit of $1,200, plus a separate $2,000 limit for heat pumps or biomass stoves. The Residential Clean Energy Credit is 30% of the cost of new systems like solar panels, with no dollar limit on the credit amount.

The Clean Vehicle Credit provides up to $7,500 for a new qualifying electric vehicle (EV) and up to $4,000 for a used one. The credit for new vehicles depends on meeting battery and mineral sourcing requirements. Eligible vehicles are subject to price caps: $80,000 for vans, SUVs, and pickups, and $55,000 for other cars.

Utilizing Tax-Advantaged Savings Accounts

Certain savings accounts offer powerful tax advantages to encourage saving for goals like retirement or healthcare.

Employer-sponsored plans like 401(k)s and individual retirement arrangements (IRAs) come in Traditional and Roth versions. With a Traditional account, contributions are often pre-tax, lowering your current taxable income, and withdrawals in retirement are taxed. With a Roth account, contributions are after-tax, but qualified withdrawals in retirement are tax-free.

For 2025, the 401(k) contribution limit is $23,500, with an additional $7,500 catch-up contribution for those age 50 and over. A new provision allows those aged 60 to 63 to make a higher catch-up contribution of $11,250 if their employer’s plan adopts it. The 2025 IRA limit is $7,000, with a $1,000 catch-up contribution for those 50 and over.

A Health Savings Account (HSA) offers a triple-tax advantage but requires enrollment in a high-deductible health plan (HDHP). For 2025, an HDHP must have a minimum deductible of $1,650 for self-only or $3,300 for family coverage. HSA contributions are tax-deductible, the funds can be invested to grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

For 2025, you can contribute up to $4,300 to an HSA for self-only coverage or $8,550 for family coverage, plus a $1,000 catch-up for those 55 and older. Unlike a Flexible Spending Account (FSA), HSA funds roll over each year. After age 65, you can withdraw funds for non-medical reasons, but those withdrawals will be taxed as ordinary income.

Implementing Tax-Efficient Investment and Gifting Methods

Managing investments in a taxable brokerage account requires strategies to minimize taxes on returns, such as tax-loss harvesting and managing capital gains.

Tax-loss harvesting is selling an investment at a loss to offset capital gains from profitable sales. If losses exceed gains, you can use up to $3,000 of the excess to offset ordinary income annually, carrying forward any remainder. The “wash-sale” rule disallows the loss if you buy a substantially identical security within 30 days of the sale.

The tax rate on investment profits depends on the holding period. Gains from assets held one year or less are short-term and taxed at ordinary income rates. Gains from assets held more than one year are long-term and taxed at lower rates of 0%, 15%, or 20%, depending on your taxable income. For 2025, a single filer with taxable income up to $48,350 pays a 0% long-term capital gains rate.

Strategic gifting can also be a tax-efficient way to transfer wealth. For 2025, the annual gift tax exclusion allows you to give up to $19,000 to any number of individuals without tax consequences; a married couple can give up to $38,000 per person. Gifts above this amount require filing a gift tax return, but tax is not owed unless you exceed your lifetime gift and estate tax exemption of $13.99 million.