Easiest ways to reduce your 2025 Tax Bill

Lets face it, everyone wants to to pay less in taxes.. Normally, people try and over complicate paying less in taxes. For most people, following basic tax strategies will be more than sufficient to minimize their year end tax liability (in another post, we will touch more on minimizing tax liabilities for business owners and self employed individuals, which get a little more interest). Below are some of the easiest ways to potentially save money on your 2025 tax bill:

1. Understand the Standard Deduction vs Itemizing:

• For the 2025 tax year (filed in 2026), the standard deduction amounts are:

  • Single: $15,000

  • Married Filing Jointly: $30,000

  • Head of Household: $22,500

  • Married Filing Separately: $15,000

• Itemizing is essentially taking the sum of the following items: Dental and Medical Expenses, Taxes paid (Real Estate and State and Local Taxes) throughout the year, mortgage interest, charitable contributions, and casualty and theft losses, and if they are greater than the standard deduction, you would itemize (forgoing the standard deduction)

• If your total itemized deductions are less than the standard deduction, taking the standard deduction will be the simplest way to reduce your taxable income.

2. Maximize Contributions to Retirement Accounts:

• Traditional IRA: Contributions may be tax-deductible in the year you make them, lowering your current taxable income. Your money grows tax-deferred until retirement. For 2025, the maximum IRA contribution is $7,000 (or $8,000 if you are age 50 or older by the end of the year).

• Roth IRA: While contributions aren't tax-deductible, your qualified withdrawals in retirement are tax-free. There are income limitations to contribute directly to a Roth IRA. For 2025, income phaseouts for direct contributions begin at $150,000 for single filers and $236,000 for those married filing jointly.

• 401(k), 403(b), 457(b) and other employer-sponsored plans: Contributing to these plans reduces your taxable income for the year. For 2025, the annual contribution limit is $23,500 (or $31,000 if you are age 50 or older). Some employers may also match your contributions, which is like getting free money and MUST be taken advantage of (Essentially a 100% return on capital, as it is free money).

• SEP IRA and SIMPLE IRA (for self-employed individuals and small business owners): These plans allow for significant deductible contributions. You can see my other post, regarding the best retirement account for individuals for more information.

3. Contribute to a Health Savings Account (HSA):

• If you have a high-deductible health plan, contributing to an HSA offers a triple tax advantage:

  • Your contributions are tax-deductible (or pre-tax if through payroll deduction).

  • Your earnings grow tax-free.

  • Your withdrawals for qualified medical expenses are tax-free.

• The funds in an HSA can roll over year after year. This unique tax advantageous account will get its own article shortly.

4. Claim Available Tax Credits:

• Tax credits directly reduce the amount of tax you owe, dollar for dollar. Here are a few common credits:

  • Earned Income Tax Credit (EITC): For low-to-moderate-income individuals and families.

  • Child Tax Credit: For those with qualifying children under age 17. For 2025, this credit is up to $2,000 per qualifying child, subject to income limitations.

  • Child and Dependent Care Credit: If you pay for childcare so you can work.

  • Saver's Credit: For those with modest income who contribute to retirement accounts.

  • American Opportunity Tax Credit and Lifetime Learning Credit: For eligible education expenses.

  • Residential Energy Tax Credits: For investments in energy-efficient home improvements or clean energy equipment like solar panels.

5. Consider Itemizing If It Makes Sense:

• While the standard deduction is high, your itemized deductions might exceed it if you have significant expenses in areas like:

  • Medical and Dental Expenses: The amount exceeding 7.5% of your adjusted gross income (AGI) is deductible.

  • Home Mortgage Interest: Deductible on the first $750,000 of mortgage debt ($375,000 if married filing separately).

  • State and Local Taxes (SALT): Limited to a total deduction of $10,000 per household. This includes state and local property taxes, income taxes (or sales taxes, if you choose to deduct those instead of income taxes), and personal property taxes.

  • Charitable Contributions: Generally deductible if made to qualified organizations, subject to certain limitations based on your AGI.

6. Adjust Your Tax Withholding (Form W-4):

• If you consistently get a large tax refund, you might be having too much tax withheld from your paychecks. By adjusting your W-4, you can potentially reduce your withholding and have more money in your pocket throughout the year. Use the IRS Tax Withholding Estimator to help determine the correct amount.

7. Explore Tax-Advantaged Savings for Education:

• 529 Plans: Contributions to these plans grow tax-deferred, and withdrawals for qualified education expenses (including K-12 and higher education) are tax-free. Some states also offer tax deductions for contributions to their state's 529 plan.

8. Keep Good Records:

• Maintain thorough records of income, expenses, and any documents related to potential deductions or credits. This will make preparing your tax return easier and ensure you don't miss out on any savings.

9. Consider Tax-Loss Harvesting:

• If you have taxable investment accounts, selling investments that have lost value can offset capital gains taxes. In some cases, you can even deduct capital losses against your ordinary income (up to a limit). The current 2025 limit for capital losses is $3,000 for single and married filed jointly taxpayers (this is the amount that can offset your W-2 income) and $1,500 for married filed separately.

10. Be Aware of Changes for 2025:

• The Tax Cuts and Jobs Act (TCJA) has several provisions set to expire at the end of 2025. It's important to stay informed about any potential changes to tax laws that could affect your 2025 tax bill. Current changes that may effect individuals are related to retirement accounts, insurance, and health saving accounts. There are several large changes that contain to businesses such as depreciation and the qualified business income deduction, which we will cover in another post.