What Are the Best Tax Saving Options?

The goal of tax savings is to legally minimize the amount of tax owed to government bodies through proactive financial planning. These opportunities are not limited to high-income individuals; people at all financial levels can find ways to reduce their tax liability. By making informed decisions throughout the year, not just at tax time, you can significantly impact the amount of tax you ultimately pay. This process involves strategically structuring finances to take advantage of benefits offered within the tax code.

Utilizing Tax-Advantaged Savings and Investment Accounts

One of the most effective ways to manage tax liability is by contributing to tax-advantaged accounts for retirement, health, and education. These accounts offer specific benefits that can either reduce your taxable income now or provide for tax-free income in the future.

Employer-sponsored retirement plans, such as the 401(k), are a primary vehicle for tax-advantaged savings. Contributions to a Traditional 401(k) are made on a pre-tax basis, which lowers your current taxable income. For 2025, an individual can contribute up to $23,500. Many employers offer a matching contribution, such as matching 50% of an employee’s contributions up to 6% of their salary, which provides a direct financial benefit.

Some employers also offer a Roth 401(k) option, where contributions are made with after-tax dollars and do not reduce current taxable income. The benefit is that qualified withdrawals in retirement, including earnings, are completely tax-free. The choice between a Traditional and Roth 401(k) depends on whether you expect a higher tax bracket now or in retirement. For 2025, individuals age 50 and over can make “catch-up” contributions of $7,500, and a special provision allows those aged 60 to 63 to contribute up to $11,250 if their plan allows.

Individual Retirement Arrangements (IRAs) offer another layer of tax-advantaged savings. For 2025, the total contribution limit for all IRAs is $7,000, with a $1,000 catch-up contribution for those age 50 and older. A Traditional IRA may offer a tax deduction depending on your income and workplace plan coverage. A Roth IRA has no upfront tax deduction, but qualified distributions are tax-free, and contributions are subject to income limitations.

Health Savings Accounts (HSAs) provide a triple-tax advantage for those in a High-Deductible Health Plan (HDHP). Contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2025, an individual with self-only HDHP coverage can contribute up to $4,300, while those with family coverage can contribute up to $8,550. To be eligible in 2025, the plan must have a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage.

For education savings, 529 Plans are a prominent tool. While contributions are not federally deductible, investments grow tax-deferred, and withdrawals for qualified education expenses are federally tax-free. Qualified expenses include college tuition, fees, books, and room and board. Many states also offer a tax deduction or credit for contributions, and funds can be used for K-12 tuition up to $10,000 per year.

Reducing Taxable Income Through Deductions

A primary method for lowering your tax bill is to reduce your adjusted gross income (AGI) through tax deductions. Each taxpayer can choose between taking the standard deduction—a fixed dollar amount—or itemizing deductions. If the total of your potential itemized deductions is greater than the standard deduction, itemizing is the more advantageous path.

For the 2025 tax year, the standard deduction for single filers is $15,000, for married couples filing jointly it is $30,000, and for heads of household it is $22,500. These amounts are adjusted annually for inflation. An additional standard deduction amount is available for taxpayers who are age 65 or older or blind.

One common itemized deduction is for state and local taxes (SALT). This includes payments for state and local income taxes or, alternatively, general sales taxes, as well as property taxes. The total amount you can deduct for SALT is capped at $10,000 per household per year ($5,000 for married individuals filing separately). This cap is set to expire after 2025 unless extended by new legislation.

Homeowners can deduct interest paid on mortgage debt used to buy, build, or improve a primary or secondary home. For mortgages taken out after December 15, 2017, interest on up to $750,000 of mortgage debt is deductible ($375,000 if married filing separately). For mortgages originated before this date, the limit is $1 million.

Charitable contributions to qualified organizations are also deductible. For cash contributions, taxpayers who itemize can deduct an amount up to 60% of their AGI. For donations of non-cash items, such as stock or property, the rules and limits can be more complex, depending on the type of property and the recipient organization.

Taxpayers with substantial medical costs may be able to claim the medical expense deduction. You can deduct the amount of qualified, unreimbursed medical expenses that exceeds 7.5% of your AGI. For example, if your AGI is $60,000, you can only deduct medical expenses above the first $4,500. Qualified expenses include payments to doctors, dentists, and hospitals, as well as costs for prescription drugs and health insurance premiums.

Claiming Valuable Tax Credits

Tax credits reduce your tax bill on a dollar-for-dollar basis. Unlike deductions, which only lower your taxable income, a tax credit directly subtracts from the amount of tax you owe. Some credits are “refundable,” meaning if the credit is larger than your tax liability, you can receive the difference as a refund.

A significant credit for families is the Child Tax Credit (CTC), worth up to $2,000 per qualifying child under age 17 for the 2025 tax year. To claim the full credit, a taxpayer’s modified AGI must be below $200,000 for single filers or $400,000 for married couples filing jointly. A portion of the CTC is refundable, up to $1,700 for 2025, which can benefit families who owe little or no income tax.

Higher education expenses can be offset by two tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC offers up to $2,500 per student for the first four years of postsecondary education, and up to $1,000 of this is refundable. The LLC is nonrefundable and offers up to $2,000 per tax return for undergraduate, graduate, and professional courses. A taxpayer cannot claim both credits for the same student in the same year.

The Earned Income Tax Credit (EITC) assists low- to moderate-income working individuals and families. The credit amount depends on income, filing status, and the number of qualifying children. For 2025, the maximum credit ranges from $649 for those with no children to $8,046 for those with three or more. To qualify, there are specific income limits and rules, including a cap on investment income of $11,600 for 2025.

Taxpayers can find credits for making homes more energy-efficient. The Energy Efficient Home Improvement Credit allows a credit of 30% of the cost of certain improvements, with an annual cap of $1,200 for most items and a $2,000 limit for equipment like heat pumps. The Residential Clean Energy Credit provides a 30% credit for new clean energy property, such as solar panels or battery storage, with no annual credit limit.

Implementing Tax-Efficient Investment Strategies

For individuals with taxable investment accounts, managing assets with tax implications in mind can lead to savings. These strategies focus on minimizing the tax impact of investment gains and interest income.

Tax-loss harvesting involves selling investments that have decreased in value to realize a capital loss. These losses can offset capital gains from profitable investments. If your capital losses exceed your capital gains, you can use up to $3,000 of the excess loss to deduct against your ordinary income, and any remaining losses can be carried forward to future years.

A critical component of tax-loss harvesting is the “wash-sale rule.” This IRS regulation prevents you from claiming a loss on a security if you buy the same or a “substantially identical” one within 30 days before or after the sale. This 61-day window is designed to stop investors from selling a security for a tax loss and immediately buying it back. Violating this rule means the loss is disallowed and added to the cost basis of the new investment.

Managing the timing of capital gains is another strategy. Short-term gains, from assets held for one year or less, are taxed at ordinary income tax rates. Long-term gains, from assets held for more than one year, are 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% rate on long-term gains, creating an incentive to hold investments for more than a year.

Asset location is a strategy that involves deciding which type of account should hold different assets. The principle is to place less tax-efficient investments—those that generate regular, taxable income like corporate bonds or mutual funds with high turnover—inside tax-advantaged accounts like a Traditional IRA or 401(k). Conversely, more tax-efficient investments, such as growth stocks held for the long term, are better suited for taxable brokerage accounts. This approach shelters the most highly taxed income and allows other assets to benefit from lower long-term capital gains rates.