How to Save Money on Taxes

Saving money on taxes can seem complicated, but it doesn’t have to be. With a bit of planning, you can reduce your tax bill and keep more of your hard earned money. 

In this how to insight, we’ll break down the key ways you can save on taxes. From deductions to credits, we’ll cover strategies that work for anyone. 

Whether you’re an employee or self-employed. Let’s cover the relevant ways to save money on taxes!

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Understanding the Basics of Taxes

What Are Taxes?

Taxes are the payments you make to the government based on your income. The more money you make, the more taxes you pay potentially. 

The government uses this money for services like roads, schools, and healthcare.

How Are Taxes Calculated?

Your taxes are based on your taxable income. This is your total income minus any deductions or exemptions. 

Once your taxable income is determined, it falls into tax brackets, which are like tiers. The higher your taxable income, the higher the tax rate in each bracket. 

But don’t worry, your entire income isn’t taxed at the highest rate. Just the portion that falls into that bracket.

For example, if your taxable income is between $96,951 – $206,700 married filing jointly then your tax rate is 22% in 2025. 

Here are the federal income tax brackets and rates:

TAX RATE BRACKETS TABLE

Key Tax Terms to Know

• Taxable income: The income used to calculate your taxes after deductions and credits.
• Deductions: Expenses or loses you can subtract from your income to lower your taxable income.
• Credits: Reductions in the amount of tax you owe.
• Capital gains: Profits from selling investments like stocks or property.

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Reduce Taxable Income Through Deductions

What Are Tax Deductions?

Tax deductions lower your taxable income, which reduces the amount of taxes you pay. Saving money on taxes.

There are two types of deductions: standard deductions and itemized deductions.

• Standard deduction: A set amount everyone gets to subtract from their income. For 2025, it’s $15,000 for single filers and $30,000 for married couples filing jointly.
  • In addition if you are 65 or over Or blind, you are able to receive an additional deduction amount:
    • Married (each eligible spouse) $1,600
    • Unmarried (single, HOH) $2,000
• Itemized deduction: When you list specific expenses, like medical bills or mortgage interest, instead of taking the standard deduction.

Common Deductions to Maximize

There are several deductions that can significantly lower your taxable income:

• Mortgage interest: If you own a home and pay interest on a mortgage, you can deduct the interest.
• State and local income taxes  (SALT): You can deduct up to $10,000 in state and local taxes, including property and income taxes. And if you are married filing separately the deduction is $5000.
• Medical expenses: If your medical expenses exceed 7.5% of your income, you can deduct the amount above that. 
• Charitable donations: Donations to qualified charities can be deducted.
• Business expenses: Self-employed? You can deduct business-related costs like supplies, marketing, or home office expenses. And you can deduct health insurance as above the line deductions for self employed only.

Uncommon deductions to maximize

The following are uncommon deductions that you may qualify for depending on your situation.

• Alimony and separate maintenance payments: These are payments paid to a former spouse under a divorce or separation decree, or agreement. 
• Money contributed to a health savings account: Your contributions to your HSA may be deductible if you itemize. And keep in mind if you itemize all of your deductions should be more than the standard deduction to save money on taxes.

Special Consideration for High-Earners

If you’re a high earner, some deductions phase out as your income increases. Be sure to check the income limits for each deduction or seek professional advice to make sure you’re getting the full benefit.

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Lower Your Tax Bill with Tax Credits

What Are Tax Credits?

Tax credits directly reduce the amount of tax you owe, and can create a tax refund. Some people value tax credits more than deductions.

However, what’s most valuable to you depends on your situation. For example, you may not have many credits that you qualify for but you do have numerous deductions that are more than the standard deduction and you can reduce your taxable income by that amount.  

Common Tax Credits

Here are a few common tax credits that can lower your tax bill:

• Child tax credit: If you have children under 17, you may qualify for a credit of up to $2,000 per child.
• Earned income tax credit (EITC): This credit helps low- to moderate-income workers. The amount you receive depends on your income and the number of children you have.
• Education credits: The American Opportunity Credit and Lifetime Learning Credit help offset the cost of tuition and education expenses.
• Energy-efficient home improvement credit: You can claim a credit for energy-saving upgrades like solar panels or energy-efficient windows.
  • Energy efficiency vehicle tax credits: Under current rules (until 2032) the purchase of energy efficient vehicles can grant you a tax credit. And save money on taxes.

Uncommon Tax Credits

• Taxes paid overseas: there is a credit available if you have taxable income that has already been taxed overseas. 
• Overpaid SSI or Railroad Retirement Tax: If you paid more tax than you were supposed to on your wages there would be a credit to return the excess amount to you. 

Refundable vs. Non-Refundable Credits

• Refundable credits: If the credit is more than the taxes you owe, you’ll get the difference as a refund.
• Non-refundable credits: These can reduce your tax bill to zero, but they won’t provide a refund.

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Maximize Contributions to Retirement Accounts

Tax-Advantaged Retirement Accounts

Contributing to retirement accounts like a 401(k) or IRA can save you a lot on taxes. These accounts offer tax benefits that either reduce your taxable income now or allow your investments to grow tax-free.

• 401(k): Contributions are made with pre-tax dollars, which lowers your taxable income. In 2025, you can contribute up to $23,500 ($31,000 if you’re 50 or older).
• IRA: You can contribute up to $7,000 ($8,000 if you’re over 50) to a traditional IRA, which also reduces your taxable income. This is if you are not actively participating in a workplace retirement plan. 
• Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free (as long as you have had the account for 5 years).

The Power of Tax-Deferred Growth

When you invest in a 401(k) or traditional IRA, your money grows tax-deferred. This means you won’t pay taxes on investment gains until you withdraw the money, typically at retirement when you’re in a lower tax bracket.

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Managing Investments and Capital Gains

Understanding Capital Gains and Losses

When you sell investments for a profit, you generate capital gains. The tax rate on capital gains depends on how long you’ve held the investment.

• Short-term capital gains: Profits from selling investments held for less than a year. These gains are taxed at your regular income tax rate.
• Long-term capital gains: Profits from selling investments held for more than a year. These are taxed at a lower rate, typically 0%, 15%, or 20%, depending on your income.

Strategies to Minimize Capital Gains Taxes

• Hold investments for over a year to benefit from lower long-term capital gains rates.
• Tax-loss harvesting: Sell investments that have lost value to offset gains from other investments.
• Be mindful of capital gains distributions from mutual funds, which can trigger unexpected tax bills.

Tax-Efficient Investment Strategies

Place high growth investments, like stocks, in tax-advantaged accounts (like your IRA or 401(k)) to avoid paying taxes on gains each year.

Also, if you are interested in how gifting to your kids or grandkids  will affect your taxes check out this insight. How Much Can I Give My Kids Before Paying IRS Gift Tax?

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Optimize Business Expenses (For Self-Employed or Small Business Owners)

What Qualifies as a Business Expense?

If you’re self-employed or run a small business, many expenses can be deducted, reducing your taxable income. To qualify, the expense must be ordinary and necessary for your business.

Common Deductible Business Expenses

• Home office deduction: Deduct the portion of your home used exclusively for business.
• Travel, meals, and entertainment: Business-related travel and meals are partially deductible.
• Vehicle expenses: Deduct the cost of using your car for business purposes, either by tracking actual expenses or using the IRS mileage rate.
• Equipment and supplies: Any equipment, tools, or supplies needed for your business are deductible.

Uncommon Deductible Business Expenses

• Business bad debt:
  • Business bad debts are losses from debts that become partly or completely worthless and are closely related to your trade or business (i.e., the primary motive for incurring the debt was business-related). Examples include loans to clients, credit sales to customers, or business loan guarantees.
  • You can deduct these bad debts (fully or partially) from gross income when calculating your taxable income by reporting them on Schedule C (Form 1040) or the applicable business income tax return. For details, refer to Publication 334.
• Nonbusiness bad debt:
  • Nonbusiness bad debts are debts that must be totally worthless to qualify as deductible and cannot be deducted partially. Report these as short-term capital losses on Form 8949, including necessary details like the debtor’s name and a “bad debt statement attached.”
  • A detailed statement is required, including the description, efforts to collect, and why the debt is deemed worthless. For more details, refer to Publication 550.

Self-Employed Retirement Plans

Contributing to a SEP IRA or Solo 401(k) can reduce your taxable income while saving for retirement. These plans allow for higher contribution limits compared to traditional IRAs.

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Take Advantage of Filing Status and Exemptions

Choose the Right Filing Status

Your filing status affects how much tax you owe. Choose the one that best fits your situation:

• Single: For individuals not married.
• Married filing jointly: Married couples can file together, often resulting in lower taxes.
• Head of household: Single filers with dependents may qualify for a lower tax rate.

Personal and Dependent Exemptions

While the personal exemption was eliminated in recent tax reforms, you may still benefit from claiming dependents, which can qualify you for other credits and deductions.

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Use Tax Preparation and Expert Advice

The Role of a Tax Preparer or Accountant

A professional can help you find deductions and credits you might miss on your own. They can also ensure you stay compliant with tax laws and avoid costly mistakes.

Avoiding Common Mistakes in Tax Filing

• Double-check deductions and credits: Make sure you’re taking every deduction and credit you qualify for.
• File on time: Avoid late-filing penalties by submitting your tax return on time or filing for an extension.

Using Tax Software vs. Hiring a Professional

For simple returns, tax software may be enough. But if your situation is more complex (self-employment, investments, etc.), it’s worth hiring a tax professional to ensure accuracy.

And if you are at least 60 years of age and make less than $67,000 a year. The IRS has partnered with Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) ; these programs provide free one-on-one tax preparation. If you want to search for a tax professional near you go to https://irs.treasury.gov/freetaxprep/ .

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Plan Ahead with Tax-Efficient Strategies

Tax Planning for the Future

Effective tax planning isn’t just for tax season. By making adjustments throughout the year, you can minimize your tax liability. Consider these strategies:

• Adjust your withholdings if you’ve had significant life changes (new job, marriage, etc.).
• Time your deductions and contributions to maximize their benefit. For example, making charitable donations or retirement contributions by December 31 can reduce your taxes for that year.

Income Shifting and Deferral Strategies

Deferring income into the next year or shifting it to a lower taxed family member can help lower your tax burden, especially if you’re close to crossing into a higher tax bracket.

However, keep in mind that these strategies must be done properly to avoid constructive receipt or needing to pay gift tax. Consult with your financial professional to discuss what strategies are best for you. 

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What’s Next in, How to Save Money on Taxes Step by Step Guide

Saving money on taxes doesn’t have to be complicated. By taking advantage of deductions, credits, and tax-advantaged accounts, you can reduce your tax bill and keep more of your money. 

Remember, a little planning goes a long way, and if your situation is complex, working with a tax professional can make all the difference. Stay informed, plan ahead, and you’ll be on your way to keeping more money in your pocket at tax time!

Have you maximized your potential to reach your financial goals? Here is the step by step guide.

Supply:

• Gather all your income sources. This includes wages, investment gains, rental income, and any other earnings.

Tools:

• Calculator