Proven Ways to Lower Your Annual Tax Bill

Lowering your annual tax bill is possible by strategically using the provisions within the U.S. tax code. A proactive approach to financial planning, where decisions are informed by their potential tax consequences, allows you to legally minimize the amount you owe.

Maximizing Itemized and Other Key Deductions

A primary decision in tax preparation is choosing between the standard deduction or itemizing. The standard deduction is a fixed amount you subtract from your adjusted gross income (AGI). For the 2024 tax year, the standard deduction was $14,600 for single filers, $29,200 for married couples filing jointly, and $21,900 for heads of household. You should itemize on Schedule A of Form 1040 only if your total deductible expenses exceed the standard deduction for your filing status.

Mortgage Interest

Homeowners who itemize can deduct interest paid on home acquisition debt for a primary and second home. For mortgages taken out after December 15, 2017, the deduction is limited to interest on up to $750,000 of debt, a limit scheduled to expire after 2025. Interest on home equity loans is only deductible if the funds are used to buy, build, or substantially improve the home securing the loan. Your lender sends Form 1098, which reports the mortgage interest you paid.

State and Local Taxes (SALT)

The State and Local Tax (SALT) deduction allows itemizers to deduct certain taxes paid to state and local governments. This includes property taxes and either income or sales taxes, but not both. The total SALT deduction is limited to $10,000 per household per year. This cap is scheduled to expire after 2025.

Charitable Contributions

If you itemize, you can deduct donations to qualified charitable organizations, including cash and the fair market value of property. For cash contributions, the deduction is limited to 60% of your AGI, a limit scheduled to revert to 50% after 2025. For any single donation of $250 or more, you must obtain a written acknowledgment from the charity. If you receive a benefit in exchange for your contribution, you must reduce your deduction by the value of that benefit.

Medical Expenses

You can deduct medical and dental expenses that exceed 7.5% of your AGI. Qualifying expenses include payments for doctors, hospital care, prescription drugs, and health insurance premiums. You can only deduct expenses that were not reimbursed by insurance or another source. Keeping detailed records of all medical payments is necessary to substantiate your claim.

Student Loan Interest

You can deduct up to $2,500 in student loan interest even if you do not itemize. This is an “above-the-line” deduction, meaning it lowers your AGI. For the 2024 tax year, the deduction began to phase out for single filers with a modified adjusted gross income (MAGI) between $80,000 and $95,000, or between $165,000 and $195,000 for joint filers. Your lender will send Form 1098-E showing the interest you paid.

Leveraging Tax Credits to Reduce Your Bill

Unlike deductions that lower taxable income, tax credits reduce your final tax bill on a dollar-for-dollar basis. A non-refundable credit can reduce your tax liability to zero, but you will not get any amount back as a refund. A refundable credit can result in a refund even if you owe no tax.

Child Tax Credit

For the 2024 and 2025 tax years, the Child Tax Credit is worth up to $2,000 per qualifying child under age 17. The credit amount and qualifying age are scheduled to change after 2025. The credit begins to phase out for taxpayers with a MAGI over $200,000 for single filers and $400,000 for joint filers. A portion of the credit is refundable through the Additional Child Tax Credit (ACTC). For 2024, up to $1,600 per child is refundable, provided you have earned income of at least $2,500.

Education Credits (AOTC & LLC)

Two tax credits help offset higher education costs: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC provides a maximum annual credit of $2,500 per student for the first four years of undergraduate education, with up to $1,000 being refundable. The LLC is a non-refundable credit worth up to $2,000 per tax return for undergraduate, graduate, and professional courses. You cannot claim both credits for the same student in the same year. For 2024, both credits phase out for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.

Clean Energy and Electric Vehicle Credits

Federal tax credits encourage investments in clean energy for homes and vehicles. Since 2024, buyers can transfer vehicle credits to a registered dealer at the point of sale to lower the upfront cost. Available credits include:

• The Energy Efficient Home Improvement Credit for upgrades like new windows, doors, and heat pumps.
• The Residential Clean Energy Credit, which provides a 30% credit for new clean energy property like solar panels, applicable to property placed in service from 2022 through 2032.
• The New Clean Vehicle Credit of up to $7,500, subject to strict requirements on battery components, vehicle MSRP, and buyer income.
• The Used Clean Vehicle Credit of up to $4,000 for qualifying used EVs.

Utilizing Retirement Accounts for Tax Reduction

Contributing to retirement accounts can reduce your current taxable income or provide tax-free growth and withdrawals in the future. The consistent use of these accounts can lead to significant tax savings over a lifetime.

Employer-Sponsored Plans (401(k), 403(b))

Contributing to an employer-sponsored plan like a traditional 401(k) or 403(b) reduces your taxes. Contributions are made with pre-tax dollars, which lowers your taxable income for the year. For example, if you earn $80,000 and contribute $10,000, you are only taxed on $70,000 of income. For 2024, the employee contribution limit was $23,000, with an additional $7,500 catch-up contribution for individuals age 50 and over. Many employers also offer a matching contribution, which grows tax-deferred with your own.

Individual Retirement Arrangements (IRAs)

An Individual Retirement Arrangement (IRA) is another option for retirement savings. For 2024, the combined annual contribution limit for all your IRAs is $7,000, with an additional $1,000 catch-up contribution for those age 50 and older.

Traditional IRA

Contributions to a Traditional IRA may be tax-deductible, reducing your taxable income. The deductibility depends on your income and whether you or your spouse are covered by a retirement plan at work. If you are covered by a workplace plan, the deduction is phased out based on your MAGI; for 2024, this phase-out for a single filer was between a MAGI of $77,000 and $87,000. The money in a Traditional IRA grows tax-deferred, and withdrawals in retirement are taxed as ordinary income.

Roth IRA

Contributions to a Roth IRA are made with after-tax dollars and are not deductible. The benefit is that qualified withdrawals in retirement, including earnings, are completely tax-free. Eligibility to contribute is based on your MAGI, with the 2024 phase-out for a single filer being between $146,000 and $161,000. Unlike a Traditional IRA, there are no required minimum distributions (RMDs) for the original owner.

Advanced Strategies and Tax-Advantaged Accounts

Several other accounts and strategies can offer tax advantages, though they may require specific eligibility or more active financial management. These methods can optimize tax outcomes for healthcare costs and investment activities.

Health Savings Account (HSA)

A Health Savings Account (HSA) is available to those enrolled in a high-deductible health plan (HDHP). HSAs offer a triple-tax advantage: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. To be eligible in 2025, you must have an HDHP with a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage. The maximum 2025 contribution is $4,300 for individuals and $8,550 for families, plus a $1,000 catch-up for those 55 and older. Unlike an FSA, HSA funds roll over each year and are not subject to a “use-it-or-lose-it” rule.

Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss to offset capital gains taxes in taxable brokerage accounts. Realized losses can cancel out an equivalent amount of capital gains. If your losses exceed your gains, you can use up to $3,000 of the excess to offset ordinary income, with any remainder carried forward to future years. Be mindful of the “wash-sale” rule, which prohibits claiming a loss if you buy the same or a similar security within 30 days before or after the sale.

Managing Capital Gains

The tax on investment profits depends on how long you hold an asset. A short-term capital gain, from an asset held one year or less, is taxed at your ordinary income tax rate. A long-term capital gain, from an asset held more than one year, is taxed at lower rates of 0%, 15%, or 20%, depending on your taxable income. For the 2024 tax year, the 0% rate applied to a single filer with taxable income up to $47,025. Holding an asset for more than a year before selling can significantly reduce your tax.