Nobody likes to see big chunks of their
paycheck vanish into thin air, but there are smart ways to save on your tax bill. And the good news? Knowing how to
reduce taxable income isn't as complicated as you might expect.
No matter what your lifestyle and finances look like, here are eight key tax strategies that can help you keep more of your hard-earned money. These options include deductions and credits you may not have thought of — and just, plain looking ahead. Read on for ways to potentially lower your tax bill moving forward.
1. Claim your tax credits
Tax credits can be your pathway to tax optimization. They legally allow you to reduce the amount of tax you owe. Unlike deductions (which lower your taxable income), credits take a direct bite out of your tax bill.
Some of the most popular tax credits include:
Even better, some credits are refundable — meaning they can get you money back, even if you owe nothing. Make sure to check the
IRS website or use a tax prep tool to see what you qualify for.
2. Make charitable donations
Doing good can also do good things for your taxes. Charitable contributions to qualifying nonprofits are often tax-deductible, whether you’re donating cash, goods, or even your mileage while driving to volunteer events.
Keep your receipts and make sure the organization is recognized by the IRS. If you itemize, these donations can help
increase your income. Now that’s a win-win!
3. Contribute to retirement accounts
Another way to stack the financial wins is through retirement contributions. Contributing to a traditional IRA can help you owe less in taxes.
Anything you add to a traditional 401(k) or IRA will help reduce your taxable income right now, while helping you build a cushion for later. And if your employer matches contributions, that’s free money on top of your tax savings.
4. Build tax-free education savings
Whether you’re a parent or you’re thinking of going back to school yourself, a 529 plan lets you save for education expenses while growing your investment tax-free. Some states even offer a deduction or credit for 529 contributions.
And you don’t need to fund the whole plan upfront — small monthly deposits are fine, too. Plus, withdrawals used for qualified expenses (like tuition and books) aren’t taxed, saving you even more.
5. Turn a side hustle into a business
Are you earning money through freelancing or selling stuff online? Whatever it is,
your side hustle could have some deductible expenses just waiting to be claimed. If your side gig is treated as a legitimate business, you can usually write off more than you might expect.
Your side gig might also open the door to a SEP IRA or Solo 401(k), which are both great tools for retirement saving and tax reduction. Bonus points if your hobby becomes profitable enough to become your main hustle.
6. Max out a health savings account (HSA)
If you’re enrolled in a high-deductible health plan (HDHP), you might also be eligible for an HSA, which offers a triple tax break:
For the current year, individuals can contribute up to $4,150 and families can contribute up to $8,300. And once you hit retirement age, you can even use HSA funds like a traditional IRA — but with fewer restrictions.
7. Adjust your withholding
If you got hit with a big tax bill last year — or got a massive refund — it might be time to tweak your W-4. Adjusting your withholding ensures you’re not giving the IRS an interest-free loan all year, or underpaying and facing penalties.
Use the
IRS’s online withholding estimator to figure out the right balance for your situation. It only takes a few minutes and can help you fine-tune how much gets taken from each paycheck.
8. Track your tax documents year-round
Last but not least, one of the simplest — yet most overlooked — ways to save on taxes is to stay on top of your financial documents. Missed receipts, forgotten deductions, or overlooked credits can cost you big time over the course of even one tax year.
It can help to keep a running list of expenses, especially if you’re self-employed. Whether you use a tax app or a spreadsheet, a little bit of organization can go a long way when it comes to
preparing for tax season.
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FAQs
At what income level do you start owing federal taxes?
You generally owe federal income tax if your gross income exceeds the standard deduction. For the 2024 tax year, the threshold for single filers under 65 is $14,600, and for married couples filing jointly it's $29,200. But these amounts can vary based on your age and filing status.
Why are you paying so much in taxes?
Several factors can contribute to a higher tax bill — insufficient tax withholding from your paycheck, additional income not subject to withholding (like freelance work or investment gains), or just not claiming all of your eligible deductions and credits.
Is it better to claim 1 or 0 on your W-4?
Claiming "0" will result in more tax being withheld from your paycheck, potentially leading to a larger refund. On the other hand, claiming "1" will mean that less tax is withheld, which will likely increase your take-home pay but possibly reduce your refund. Or, it could lead to a tax bill if it's determined you owe.
The best choice depends on your financial situation and whether you prefer a larger paycheck now or a refund later.
How can you legally reduce your taxable income?
You can legally lower your taxable income by contributing to retirement accounts like a 401(k) or traditional IRA, utilizing health savings accounts (HSAs), and claiming deductions for student loan interest or tuition, as well as taking advantage of any eligible tax credits. Keeping thorough records and consulting with a tax professional can also help identify all of your potential tax-saving opportunities.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
This Blog was sponsored by EarnIn. While the author received compensation, the information shared is grounded in independent research and intended to provide helpful and accurate guidance to readers.
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