Tax season often feels like a looming shadow over your financial life. While taxes can trigger stress and anxiety, some proactive planning can help you significantly reduce what you will owe the IRS in 2025.
There are plenty of legal ways to lower your tax bill so you can build wealth and keep as much of your hard-earned money as possible. And they don’t require you to become a financial expert.
Here are some things you can do now to lower your tax bill early next year.
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1. Adjust your tax withholding
One of the easiest ways to prevent a big tax bill is by adjusting your tax withholding. If too little is being withheld from your paycheck, you may end up owing money to the IRS when you file a return.
To fix this, simply fill out a new W-4 form to reflect the amount you want withheld. Making this adjustment ensures that taxes are taken out in line with your current financial situation.
Own a car? Here's 7 warning signs you're paying too much for car insurance. 2. Maximize your deductions
Deductions play a critical role in reducing your taxable income, so make sure you take advantage of all the deductions available to you.
From mortgage interest to medical expenses and charitable contributions, these deductions can significantly lower the amount you owe.
Itemizing your deductions instead of taking the standard deduction might be more beneficial for you, especially if your deductible expenses exceed the standard deduction amount. For most people, this is not the case — but you could be the exception to the rule.
3. Find tax credits for which you qualify
Tax credits are even more valuable than deductions because they reduce your tax bill dollar for dollar. That differs from deductions, which simply lower your taxable income.
Researching and taking advantage of the credits you qualify for can greatly reduce your tax liability and put more money back in your pocket.
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4. Make contributions to your retirement plan
Contributing to a traditional IRA or a 401(k) is an excellent way to lower your taxable income. These contributions can help you defer taxes and build wealth simultaneously.
Contributions to a traditional IRA or 401(k) are made with pre-tax dollars, meaning they lower your taxable income for the year. Not only are you preparing for your future, but you are also reducing your current tax burden.
5. Claim dependents if you can
Claiming dependents on your tax return can qualify you for additional credits and deductions. Whether it’s children, grandchildren, or other dependents, make sure you understand the criteria and benefits involved.
Properly identifying and claiming your dependents can help you significantly reduce your tax obligation.
6. Use self-employment deductions if you qualify
If you are self-employed, you should qualify for numerous deductions.
For example, you might be able to deduct expenses related to your business, such as home office space, travel, equipment, and health insurance premiums.
Self-employed individuals can also benefit from contributions to a SEP IRA or a solo 401(k), which are accounts specifically designed for business owners. They often offer higher contribution limits than traditional retirement accounts.
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If you are self-employed or have other income sources that aren’t subject to withholding, you must pay estimated taxes. Estimated taxes are typically paid quarterly and are based on the income you have earned during that period.
Calculating and paying these taxes accurately can help you avoid the surprise of a hefty tax bill and penalties at the end of the year.
8. Contribute to an HSA or FSA
Health savings accounts (HSAs) and flexible spending accounts (FSAs) are not only great tools for saving on medical expenses, but they also offer tax advantages.
Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. FSAs allow you to use pre-tax dollars to pay for out-of-pocket medical expenses, which can also lower your taxable income.
9. Take your required minimum distribution (RMD)
If you’re 73 or older, the IRS requires you to take required minimum distributions (RMDs) from some types of retirement accounts. Failure to take these distributions can result in hefty penalties.
Be proactive in calculating and withdrawing the correct amount each year so you stay compliant. These distributions are typically based on your account balance and life expectancy, and it’s important to understand the calculations to ensure you are withdrawing the correct amount.
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10. Consider a qualified charitable distribution
If you’re over 70½ and have an IRA, consider making a qualified charitable distribution (QCD). This allows you to donate up to $100,000 from your IRA to a charity, reducing your taxable income and potentially fulfilling your RMD requirements simultaneously.
These distributions can be a strategic way to support causes you care about while enjoying tax benefits. The amount you donate via QCDs is excluded from your taxable income, offering a tax-efficient way to give back.
11. Use tax-loss harvesting
If you have investments, tax-loss harvesting can help offset gains and reduce your taxable income. By selling losing investments, you can counterbalance gains and even reduce ordinary income up to a certain limit.
This strategy involves analyzing your investment portfolio to identify any underperforming assets and strategically selling them to realize a loss. Those losses can then be used to offset gains elsewhere in your portfolio, which gives you an unexpected way to boost your bank account .
Bottom line
Being proactive and implementing these strategies now can significantly reduce your tax burden when 2025 rolls around. By being informed and strategic, you can keep more of your hard-earned money.
Taking the time to plan now not only helps you get ahead financially but also allows you to focus on other aspects of life without the looming stress of taxes.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt . Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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