10 Legal Ways to Reduce Your Tax Bill

The U.S. tax code is complex, but it is also full of legal ways to reduce what you owe. The key is understanding the difference between tax deductions (which reduce your taxable income) and tax credits (which reduce your actual tax bill dollar-for-dollar). Credits are more powerful, but deductions are more widely available.

Here are 10 proven strategies that can lower your tax liability, roughly ordered from the most impactful to the most situational. Most of these moves need to be made before December 31 to count for the current tax year.

1. Maximize Your 401(k) Contributions

Contributing to a traditional 401(k) is the single most effective tax reduction strategy for most employees. Every dollar you contribute reduces your taxable income dollar-for-dollar. For 2025, you can contribute up to $23,500 if you are under 50, or $31,000 if you are 50 or older (thanks to the $7,500 catch-up contribution).

If you are in the 22% federal tax bracket and contribute the full $23,500, you save $5,170 in federal income tax that year. You also save on state income tax in most states. The money grows tax-deferred until you withdraw it in retirement, when you may be in a lower bracket.

Roth 401(k) alternative: If you expect to be in a higher bracket in retirement, Roth 401(k) contributions do not reduce your current taxes, but withdrawals in retirement are completely tax-free. For a full comparison, see our guide on 401(k) vs IRA.

2. Open and Fund a Health Savings Account (HSA)

The HSA is arguably the most tax-advantaged account in the entire tax code. It offers a triple tax benefit: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.

To be eligible, you must be enrolled in a High Deductible Health Plan (HDHP). For 2025, the contribution limits are $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up if you are 55 or older.

If you contribute through payroll deduction, HSA contributions are also exempt from FICA taxes (Social Security and Medicare), saving you an additional 7.65%. No other retirement or savings account offers this benefit. Even if you do not use the funds for medical expenses now, you can invest them and let them grow for decades, then use them tax-free for healthcare costs in retirement.

3. Contribute to a Traditional IRA

If you do not have a 401(k) at work, or if your income is below certain thresholds, you can deduct contributions to a Traditional IRA. The 2025 limit is $7,000 ($8,000 if you are 50 or older).

If you are covered by a workplace plan, the deduction phases out at higher incomes: $79,000 to $89,000 for single filers and $126,000 to $146,000 for married filing jointly. If you are not covered by a workplace plan, there is no income limit on the deduction.

Even if you cannot deduct IRA contributions, you can still make non-deductible contributions and potentially convert them to a Roth IRA (the "backdoor Roth" strategy).

4. Itemize Deductions When It Makes Sense

The standard deduction for 2025 is $15,000 for single filers and $30,000 for married filing jointly. You should itemize only if your total itemized deductions exceed these amounts. Common itemized deductions include:

• State and local taxes (SALT): You can deduct up to $10,000 in state income taxes, property taxes, and local taxes combined. This cap makes itemizing less beneficial for residents of high-tax states than it used to be.
• Mortgage interest: Deductible on up to $750,000 of mortgage debt for homes purchased after December 15, 2017.
• Charitable contributions: Cash donations to qualified organizations, up to 60% of your adjusted gross income.
• Medical expenses: Deductible to the extent they exceed 7.5% of your adjusted gross income.

Even if you normally take the standard deduction, consider "bunching" deductions: concentrating two years of charitable giving or medical procedures into a single year to exceed the standard deduction threshold in that year, then taking the standard deduction the next year.

5. Harvest Investment Losses

Tax-loss harvesting is the practice of selling investments that have declined in value to offset capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 of the excess against ordinary income each year, and carry forward any remaining losses to future years.

This strategy is most useful in taxable brokerage accounts. Losses in tax-advantaged accounts like 401(k)s and IRAs do not count because those gains are not taxed currently. Be careful of the wash-sale rule: if you buy a substantially identical security within 30 days before or after the sale, the loss is disallowed.

6. Claim Education Tax Credits

Two major tax credits are available for education expenses:

• American Opportunity Tax Credit (AOTC): Worth up to $2,500 per student for the first four years of college. Forty percent ($1,000) is refundable, meaning you can get it even if you owe no tax. Income phase-out begins at $80,000 for single filers and $160,000 for married filing jointly.
• Lifetime Learning Credit: Worth up to $2,000 per tax return (not per student) for any post-secondary education or courses to improve job skills. Income phase-out begins at $80,000 single / $160,000 married filing jointly.

You cannot claim both credits for the same student in the same year. The AOTC is generally more valuable if you are eligible.

7. Make Strategic Charitable Contributions

Beyond cash donations, consider donating appreciated assets like stocks or mutual funds. When you donate securities you have held for more than one year, you deduct the full market value and avoid paying capital gains tax on the appreciation. This is one of the most tax-efficient forms of giving.

If you are 70 and a half or older, you can make Qualified Charitable Distributions (QCDs) directly from your IRA to a charity, up to $105,000 per year. QCDs count toward your Required Minimum Distribution but are excluded from your taxable income.

8. Use the Child Tax Credit and Dependent Care Credit

The Child Tax Credit is worth up to $2,000 per qualifying child under age 17. Up to $1,700 is refundable for 2025. The credit begins to phase out at $200,000 for single filers and $400,000 for married filing jointly.

The Child and Dependent Care Credit allows you to claim 20% to 35% of up to $3,000 in care expenses for one dependent or $6,000 for two or more, depending on your income. This covers daycare, preschool, before/after school programs, and summer day camps.

If your employer offers a Dependent Care FSA, you can set aside up to $5,000 pre-tax for childcare expenses. You cannot claim the credit on the same expenses you run through the FSA, so calculate which option saves more.

9. Time Your Income and Deductions

If you have some control over when you receive income (bonuses, freelance payments, business income), you may benefit from shifting income into a year when you expect to be in a lower tax bracket. Similarly, accelerating deductions into a higher-income year maximizes their value.

This is particularly useful if you expect a significant income change: starting or leaving a job, retiring mid-year, or taking an unpaid sabbatical. The progressive tax system means shifting $10,000 from a year when you are in the 32% bracket to a year when you are in the 22% bracket saves $1,000.

10. Contribute to a 529 Education Savings Plan

While 529 contributions are not deductible on your federal return, over 30 states offer a state income tax deduction or credit for contributions. The money grows tax-free, and withdrawals for qualified education expenses (tuition, books, room and board) are tax-free at both the federal and state level.

Since 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary (subject to annual Roth contribution limits and a $35,000 lifetime cap), reducing the risk of over-funding the account.

Bonus: Strategies That Do Not Work

A few common misconceptions to avoid:

• "Earn less to pay less tax." Because tax brackets are marginal, earning more always results in more after-tax income. You never lose money by moving into a higher bracket.
• "I should get a big refund." A large refund means you overpaid your taxes throughout the year. That money could have been in your paycheck or invested. Adjust your W-4 to get closer to zero.
• "My accountant will find all the deductions." Tax professionals can only work with the records and transactions you provide. The strategies above require action on your part throughout the year, not just at tax time.

Next Steps

Start with the strategies that apply to your situation and have the highest impact. For most employees, maximizing your 401(k) and opening an HSA (if eligible) will save more than any other single action.

Use our tax calculator to estimate your federal tax liability and see how these strategies affect your bottom line. And if you are not sure whether a 401(k) or IRA is the better choice for your retirement savings, our 401(k) vs IRA comparison guide breaks down the differences in detail.